[Federal Register Volume 84, Number 44 (Wednesday, March 6, 2019)]
[Notices]
[Pages 8138-8141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03982]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85220; File No. SR-NYSEArca-2019-06]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Amend Commentary .01 to NYSE Arca Rule
8.600-E Relating to Generic Listing Standards for Managed Fund Shares
Applicable To Holdings in Fixed Income Securities
February 28, 2019.
Pursuant to Section 19(b)(1)\1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on February 14, 2019, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``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 amend Commentary .01(b)(5) to NYSE Arca
Rule 8.600-E relating to a generic listing standards for Managed Fund
Shares applicable to holdings in fixed income securities. The proposed
change is available on the Exchange's website at www.nyse.com, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change 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,
[[Page 8139]]
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
Commentary .01 to NYSE Arca Rule 8.600-E sets forth generic listing
standards for listing and trading of Managed Fund Shares on the
Exchange.\4\ The Exchange proposes to amend Commentary .01(b)(5) to
Rule 8.600-E, as described below.\5\
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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) (the ``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.
\5\ The Commission approved the generic listing standards in
Commentary .01 to NYSE Arca Rule 8.600-E in Securities Exchange Act
Release No. 78397 (July 22, 2016), 81 FR 49320 (July 27, 2016) (SR-
NYSEArca-2015-110) (Order Granting Approval of Proposed Rule Change,
as Modified by Amendment No. 7 Thereto, Amending NYSE Arca Equities
Rule 8.600 to Adopt Generic Listing Standards for Managed Fund
Shares).
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Proposed Amendment to Commentary .01(b)(5) to Rule 8.600-E
Commentary .01(b) to NYSE Arca Rule 8.600-E sets forth generic
listing standards applicable to fixed income securities included in the
portfolio of a series of Managed Fund Shares.\6\ Commentary .01(b)(5)
provides that non-agency, non- GSE and privately-issued mortgage-
related and other asset-backed securities (``ABS'' and, collectively,
``non-agency ABS'') components of a portfolio shall not account, in the
aggregate, for more than 20% of the weight of the fixed income portion
of the portfolio. The Exchange proposes to amend Commentary .01(b)(5)
by deleting the words ``fixed income portion'' to provide that such 20%
limitation would apply to the entire portfolio rather than to only the
fixed income portion of the portfolio. Thus, Commentary .01(b)(5) would
provide that non-agency, non-GSE and privately-issued mortgage-related
and other ABS components of a portfolio shall not account, in the
aggregate, for more than 20% of the weight of the portfolio.
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\6\ Commentary .01(b) provides that fixed income securities are
debt securities that are notes, bonds, debentures or evidence of
indebtedness that include, but are not limited to, U.S. Department
of Treasury securities (``Treasury Securities''), government-
sponsored entity securities (``GSE Securities''), municipal
securities, trust preferred securities, supranational debt and debt
of a foreign country or a subdivision thereof, investment grade and
high yield corporate debt, bank loans, mortgage and asset backed
securities, and commercial paper.
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The Exchange believes this amendment is appropriate because a
fund's investment in non-agency, non-GSE and privately-issued mortgage-
related and other ABS may provide a fund with benefits associated with
increased diversification, as such investments may be less correlated
to interest rates than many other fixed income securities. The Exchange
notes that application of the 20% limitation only to the fixed income
portion of a fund's portfolio may impose a much more restrictive
percentage limit on permitted holdings of non-agency ABS for funds that
have a more diversified investment portfolio than for funds that hold
principally or exclusively fixed income securities. For example, a fund
holding 100% of its assets in fixed income securities can hold 20% of
its entire portfolio's weight in non-agency ABS. In contrast, a fund
holding 25% of its assets in fixed income securities, 25% in U.S
Component Stocks, and 50% in cash and cash equivalents is limited to a
5% (25%*20%=5%) allocation to non-agency ABS. The Exchange, therefore,
believes application of the 20% limitation to a fund's entire portfolio
would be more equitable for Managed Fund Shares issuers with different
investment objectives and holdings.
In addition, a fund's investment in non-agency, non-GSE and
privately-issued mortgage-related and other ABS will be subject to a
fund's liquidity risk management program as approved by a fund's board
of directors.\7\ The liquidity procedures generally include public
disclosure by funds of their liquidity and redemption practices. A
fund's holdings in non-agency ABS would be encompassed within a fund's
liquidity risk management program. To the extent a fund's procedures
facilitate its ability to meet its redemption obligations, they may
reduce potential manipulation of a fund's shares by promoting an
efficient redemption mechanism for exchange-traded funds, including
funds that hold non-agency ABS.
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\7\ Rule 22e-4(b) under the 1940 Act requires, among other
things, that a fund ``adopt and implement a written liquidity risk
management program that is reasonably designed to assess and manage
its liquidity risk.'' The rule is ``designed to promote effective
liquidity risk management throughout the open-end investment company
industry, thereby reducing the risk that funds will be unable to
meet their redemption obligations and mitigating dilution of the
interests of fund shareholders.'' See Release Nos. 33-10233; IC-
32315; File No. S7-16-15 (October 13, 2016).
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The Exchange notes that the Commission has previously approved the
listing of actively managed exchange-traded funds that can invest 20%
of their total assets in non-U.S. Government, non-agency, non-GSE and
other privately issued ABS and mortgage-backed securities (``MBS'').\8\
In addition, the Commission has previously approved listing and trading
of shares of an issue of Managed Fund Shares where such fund's
investments in non-U.S. Government, non-agency, non-GSE and other
privately issued ABS will, in the aggregate, not exceed 20% of the
total assets of the fund, rather than the weight of the fixed income
portion of the fund's portfolio.\9\ Therefore, the Exchange believes it
is appropriate to apply the 20% limitation to a fund's investment in
non-agency, non-GSE and privately-issued mortgage-related and other ABS
components of a portfolio in Commentary .01(b)(5) to a fund's total
assets.
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\8\ See, e.g., Securities Exchange Act Release Nos. 80946 (June
15, 2017) 82 FR 28126 (June 20, 2017) (SR-NASDAQ-2017-039)
(permitting the Guggenheim Limited Duration ETF to invest up to 20%
of its total assets in privately-issued, non-agency and non-GSE ABS
and MBS); 76412 (November 10, 2015), 80 FR 71880 (November 17, 2015)
(SR-NYSEArca-2015-111) (permitting the RiverFront Strategic Income
Fund to invest up to 20% of its assets in privately-issued, non-
agency and non-GSE ABS and MBS); 74814 (April 27, 2015), 80 FR 24986
(May 1, 2015) (SR-NYSEArca-2014-107) (permitting the Guggenheim
Enhanced Short Duration ETF to invest up to 20% of its assets in
privately-issued, non-agency and non-GSE ABS and MBS); 74109
(January 21, 2015), 80 FR 4327 (January 27, 2015) (SR-NYSEArca-2014-
134) (permitting the IQ Wilshire Alternative Strategies ETF to
invest up to 20% of its total assets in MBS and other ABS, without
any limit on the type of such MBS and ABS).
\9\ See Securities Exchange Act Release No. 83319 (May 24,
2018), 83 FR 25097 (May 31, 2018) (SR-NYSEArca-2018-15) (Order
Approving a Proposed Rule Change, as Modified by Amendment No. 1
Thereto, to Continue Listing and Trading Shares of the PGIM Ultra
Short Bond ETF Under NYSE Arca Rule 8.600-E).
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The Exchange believes the proposed amendments would provide issuers
of Managed Fund Shares with additional investment choices for fund
portfolios for issues permitted to list and trade on the Exchange
pursuant to the Rule 19b-4(e), which would enhance competition among
market participants, to the benefit of investors and the marketplace.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\10\ in general, and furthers the
objectives of Sections 6(b)(5) of the Act,\11\ in particular,
[[Page 8140]]
because it 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 regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to, and
perfect the mechanisms of, a free and open market and a national market
system and, in general, to protect investors and the public interest
and because it is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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The Exchange has in place surveillance procedures that are adequate
to properly monitor trading in series of Managed Fund Shares in all
trading sessions and to deter and detect violations of Exchange rules
and applicable federal securities laws. The Exchange notes that the
Exchange or Financial Industry Regulatory Authority (``FINRA''), on
behalf of the Exchange, or both, would communicate as needed regarding
trading in Managed Fund Shares with other markets and other entities
that are members of the Intermarket Surveillance Group, and the
Exchange or FINRA, on behalf of the Exchange, or both, could obtain
trading information regarding trading in Managed Fund Shares from such
markets and other entities. In addition, the Exchange could obtain
information regarding trading in Managed Fund Shares from markets and
other entities that are members of ISG or with which the Exchange has
in place a comprehensive surveillance sharing agreement.
With respect to the proposed amendment to Commentary .01(b)(5), the
Exchange believes this amendment is appropriate because a fund's
investment in non-agency, non-GSE and privately-issued mortgage-related
and other ABS may provide a fund with benefits associated with
increased diversification, as such investments may be less correlated
to interest rates than many other fixed income securities. As noted
above, application of the 20% limitation to only the fixed income
portion of a fund's portfolio may impose a much lower percentage limit
on permitted holdings of non-agency ABS for funds that have a more
diversified investment portfolio than for funds that hold principally
or exclusively fixed income securities. The Exchange, therefore,
believes application of the 20% limitation to a fund's entire portfolio
would be more equitable for Managed Fund Shares issuers with different
investment objectives and holdings.
In addition, a fund's investment in non-agency, non-GSE and
privately-issued mortgage-related and other ABS will be subject to a
fund's risk management program as approved by a fund's board of
directors, as required by Rule 22e-4 under the 1940 Act, which requires
investment companies, including in-kind exchange-traded funds, to adopt
a liquidity risk management program.\12\ The liquidity procedures
generally include public disclosure by funds of their liquidity and
redemption practices. A fund's holdings in non-GSE and privately-issued
mortgage-related and other ABS would be encompassed within a fund's
liquidity risk management program. To the extent a fund's procedures
facilitate its ability to meet its redemption obligations, they may
reduce potential manipulation of a fund's shares by promoting an
efficient redemption mechanism for exchange-traded funds, including
those that hold non-agency ABS.
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\12\ See note 7, supra.
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The Exchange notes that the Commission has previously approved the
listing of actively managed exchange-traded funds that can invest 20%
of their total assets in non-U.S. Government, non-agency, non-GSE and
other privately issued ABS and MBS.\13\ In addition, the Commission has
previously approved listing and trading of shares of an issue of
Managed Fund Shares where such fund's investments in non-U.S.
Government, non-agency, non-GSE and other privately issued ABS will, in
the aggregate, not exceed more than 20% of the total assets of the
fund, rather than the weight of the fixed income portion of the fund's
portfolio.\14\ Therefore, the Exchange believes it is appropriate to
apply the 20% limitation to a fund's investment in non-agency, non-GSE
and privately-issued mortgage-related and other ABS components of a
portfolio in Commentary .01(b)(5) to a fund's total assets.
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\13\ See note 8, supra.
\14\ See note 9, supra.
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The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
additional types of Managed Fund Shares that will enhance competition
among market participants, to the benefit of investors and the
marketplace.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\15\ the Exchange
believes that the proposed rule change would not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. The proposed rule change would permit Exchange
listing and trading under Rule 19b-4(e) of additional types of Managed
Fund Shares, which would enhance competition among market participants,
to the benefit of investors and the marketplace.
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\15\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2019-06 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-2019-06. 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/
[[Page 8141]]
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-2019-06 and should
be submitted on or before March 27, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-03982 Filed 3-5-19; 8:45 am]
BILLING CODE 8011-01-P