[Federal Register Volume 84, Number 115 (Friday, June 14, 2019)]
[Notices]
[Pages 27816-27822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12542]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86072; File No. SR-NASDAQ-2019-039]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Nasdaq Rule 5615 To Allow Additional Issuers Who List Only
Specific Securities To Be Able To Avail Themselves of Certain
Exemptions Under Corporate Governance Requirements and To Amend Nasdaq
Rule IM-5620 To Exclude Additional Categories of Issuers Listing Only
Specific Securities From the Annual Shareholder Meeting Requirement
June 10, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 28, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. 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\ 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 Nasdaq Rule 5615 to modify the
exemptions available from certain corporate governance requirements,
add similar exemptions for issuers of only non-voting preferred
securities and debt securities, and add a definition of ``Derivative
Securities''.
Nasdaq also proposes to amend Nasdaq Rule IM-5620 to modify the
exemptions from the annual meeting requirements in Nasdaq Rule 5620(a)
to include issuers of only non-voting preferred securities and debt
securities in such exemptions. In addition, as discussed below, the
proposed exemptions from certain corporate governance and annual
meeting requirements will also be available to securities included in
the new definition of ``Derivative Securities''. The Exchange notes
that the proposed changes would result in rules that are substantially
similar to the existing rules of the NYSE Arca, Inc. (``Arca'').\3\
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\3\ See Arca Rule 5.3-E (Corporate Governance and Disclosure
Policies).
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[[Page 27817]]
The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.cchwallstreet.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 Exchange 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 these 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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to (i) amend Nasdaq Rule 5615 (Exemptions
from Certain Corporate Governance Requirements), which outlines the
exemptions available from some of its corporate governance requirements
for certain issuers, as well as to modify and expand the exemptions
available to issuers of certain securities; (ii) add a definition for
``Derivative Securities'' applicable only to the Nasdaq Rule 5600
Series; (iii) detail the exemptions available to issuers that only list
non-voting preferred securities, debt securities, and Derivative
Securities; and (iv) amend Nasdaq Rule IM-5620 to update the exemptions
from the annual meeting requirements to include issuers that only list
non-voting preferred securities, debt securities, and Derivative
Securities. The Exchange notes that the proposed changes would result
in rules that are substantially similar to the existing rules of Arca
\4\ and are supported by prior Commission approval orders \5\ and
immediately effective exchange proposals.\6\ However while NextShares
(Nasdaq Rule 5745) are included in the new definition for ``Derivative
Securities'', Arca rules do not include an equivalent product. But for
the reasons discussed below, the Exchange believes that NextShares are
entitled to the proposed exemptions because NextShares are similar to
products listed pursuant to both Nasdaq and Arca rules.
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\4\ Id.
\5\ See Securities Exchange Act Release No. 49810 (June 4,
2004), 69 FR 32647 (June 10, 2004) (SR-PCX-2003-35) (adopting the
predecessor to Arca Rule 5.3-E), Securities Exchange Act Release No.
57268 (February 4, 2008), 73 FR 7614 (February 8, 2008) (SR-Amex-
2006-31), and Securities Exchange Act Release No. 53578 (March 30,
2006), 71 FR 17532 (April 6, 2006) (SR-NASD-2005-073).
\6\ See Securities Exchange Act Release No. 83324 (May 24,
2018), 83 FR 25076 (May 31, 2018) (SR-NYSEArca-2018-31).
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Nasdaq Rule 5615 currently provides exemptions to issuers of
certain securities listed pursuant to the Nasdaq Rule 5700 series from
portions of the Nasdaq Rule 5600 series.\7\ Nasdaq Rule 5615(a)(1)
provides exemptions for asset-backed issuers \8\ and other passive
issuers \9\ from the provisions of Nasdaq Rule 5605(b) (as related to
the majority independent directors), Nasdaq Rule 5605(c) (Audit
Committee Requirements), Nasdaq Rule 5605(d) (Compensation Committee
Requirements), Nasdaq Rule 5605(e) (Independent Director Oversight of
Director Nominations), Nasdaq Rule 5610 (Code of Conduct), and Nasdaq
Rule 5615(c)(2) (Controlled Company Exemption).
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\7\ Nasdaq notes that Cooperative and Limited Partnerships are
not listed pursuant to the Nasdaq Rule 5700 Series. Therefore,
Nasdaq Rules 5615(a)(2) and 5615(a)(4) which describe the exemptions
from the Nasdaq Rule 5600 series for Cooperatives and Limited
Partnerships, respectively are not applicable to this filing.
\8\ IM-5615-1 defines as issuers ``that are organized as trusts
or other unincorporated associations that do not have a board of
directors or persons acting in a similar capacity and whose
activities are limited to passively owning or holding (as well as
administering and distributing amounts in respect of) securities,
rights, collateral or other assets on behalf of or for the benefit
of the holders of the listed securities.''
\9\ Nasdaq Rule 5615(a)(1)(B) includes Portfolio Depositary
Receipts as an example of a passive issuer.
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Nasdaq Rule 5615(a)(3) provides the parameters around which a
Foreign Private Issuer may rely on home country practice in lieu of
certain requirements of the Nasdaq Rule 5600 series. This rule also
includes the disclosure requirements when an issuer chooses to follow
home country practice. Certain products listed pursuant to the Nasdaq
Rule 5700 Series are able to rely on Nasdaq Rule 5615(a)(3) as they are
issued by Foreign Private Issuers.\10\ Nasdaq Rule 5615(a)(5) provides
exemptions for management investment companies registered under the
Investment Company Act of 1940 \11\ from the provisions of Nasdaq Rule
5605(b) (Independent Directors), Nasdaq Rule 5605(d) (Compensation
Committee Requirements), Nasdaq Rule 5605(e) (Independent Director
Oversight of Director Nominations), and Nasdaq Rule 5610 (Code of
Conduct).
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\10\ Currently, issuers of securities such as Linked Securities
(Nasdaq Rule 5710) that are foreign private issuers and have a
primary equity listing on either Nasdaq or the New York Stock
Exchange are able to utilize the exemptions provided for in Nasdaq
Rule 5615(a)(3).
\11\ 15 U.S.C 80a.
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In addition, under Nasdaq Rule 5615(a)(5), management investment
companies are exempt from Nasdaq Rule 5605(c) (Audit Committee
Requirements), except for the provisions of Rule 10A-3 of the
Securities Exchange Act of 1934 (``SEC Rule 10A-3'').\12\ Currently,
products that can rely on the exemptions within Nasdaq Rule 5615(a)(5)
are Index Fund Shares (Nasdaq Rule 5705(b)), Managed Fund Shares
(Nasdaq Rule 5735) and NextShares (Nasdaq Rule 5745).
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\12\ 17 CFR 240.10A-3.
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Nasdaq IM-5620 provides exemptions to issuers of certain securities
listed pursuant to the requirements of Nasdaq Rule 5620(a) (Meetings of
Shareholders). Currently, Portfolio Depositary Receipts (Nasdaq Rule
5705(a)), Index Fund Shares (Nasdaq Rule 5705(b)), and Trust Issued
Receipts (Nasdaq Rule 5720) are exempt from the annual meeting
requirements.\13\
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\13\ Nasdaq IM-5620 also exempts securities listed pursuant to
Nasdaq Rule 5730(a) (unless the listed security is a common stock or
voting preferred stock equivalent).
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Nasdaq proposes to add a definition of ``Derivative Securities'' to
Nasdaq Rule 5615 (the ``Proposed Definition'').\14\ This definition
will include Portfolio Depository Receipts (Nasdaq Rule 5705(a)), Index
Fund Shares (Nasdaq Rule 5705(b)), Equity Index-Linked Securities
(Nasdaq Rule 5710(k)(i)), Commodity-Linked Securities (Nasdaq Rule
5710(k)(ii)), Fixed Income Index-Linked Securities (Nasdaq Rule
5710(k)(iii)), Futures-Linked Securities (Nasdaq Rule 5710(k)(iv)),
Multifactor Index-Linked Securities (Nasdaq Rule 5710(k)(v)), Index-
Linked Exchangeable Notes (Nasdaq Rule 5711(a)), Equity Gold Shares
(Nasdaq Rule 5711(b)), Trust Certificates (Nasdaq Rule 5711(c)),
Commodity-Based Trust Shares (Nasdaq Rule 5711(d)), Currency Trust
Shares (Nasdaq Rule 5711(e)), Commodity Index Trust Shares (Nasdaq Rule
5711(f)), Commodity Futures Trust Shares (Nasdaq Rule 5711(g)),
Partnership Units (Nasdaq Rule 5711(h)), Managed Trust Securities
(Nasdaq Rule 5711(j)), Selected Equity-linked Debt Securities
(``SEEDS'') (Nasdaq Rule 5715), Trust Issued Receipts (Nasdaq Rule
5720), Managed Fund Shares (Nasdaq Rule 5735)), and
[[Page 27818]]
NextShares (Nasdaq Rule 5745).\15\ Securities included in the proposed
definition will be exempt from certain corporate governance
requirements of Nasdaq Rule 5605 and the annual meeting requirements in
Nasdaq Rule 5620(a) as described in this proposal. Nasdaq notes that
these issuers may still be required to hold shareholder meetings,
including special meetings, as required by federal or state law or
their governing documents.
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\14\ Proposed Nasdaq Rule 5615(a)(6)(B).
\15\ NYSE Arca rules do not include an equivalent to Nasdaq Rule
5745 (NextShares).
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Below are the securities included in the Proposed Definition, as
well as a reference to the comparable Arca rules for listing similar
securities that are entitled to similar exemptions as proposed herein:
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Product type Nasdaq rule Arca rule
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Commodity Futures Trust 5711(g)............ 8.204-E.
Shares.
Commodity Index Trust Shares. 5711(f)............ 8.203-E.
Commodity-Based Trust Shares. 5711(d)............ 8.201-E.
Commodity-Linked Securities 5710(k)(ii)........ 5.2-E(j)(6)(B)(II).
\16\.
Currency Trust Shares........ 5711(e)............ 8.202-E.
Equity Gold Shares........... 5711(b)............ 5.2-E(j)(5).
Selected Equity-Linked Debt 5715............... 5.2-E(j)(2) (Equity
Securities (``SEEDS''). Linked Notes).
Equity-Index Linked 5710(k)(i)......... 5.2-E(j)(6)(B)(I).
Securities.
Fixed-Income Linked 5710(k)(iii)....... 5.2-E(j)(6)(B)(IV).
Securities.
Futures-Linked Securities.... 5710(k)(iv)........ 5.2-E(j)(6)(B)(V).
Index Fund Shares (ETFs)..... 5705(b)............ 5.2-E(j)(3)
(Investment Company
Units).
Index-Linked Exchangeable 5711(a)............ 5.2-E(j)(4).
Notes.
Managed Fund Shares.......... 5735............... 8.600-E.
Managed Trust Securities..... 5711(j)............ 8.700-E.
Multifactor Index-Linked 5710(k)(v)......... 5.2-E(j)(6)(B)(VI).
Securities.
NextShares................... 5745............... N/A.
Partnership Units............ 5711(h)............ 8.300-E.
Portfolio Depositary Receipts 5705(a)............ 8.100-E.
Trust Certificates........... 5711(c)............ 5.2-E.(j)(7).
Trust Issued Receipts........ 5720............... 8.200-E.
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\16\ The Exchange notes that listing standards for both
Commodity and Currency-Linked Securities are included within Nasdaq
Rule 5710(k)(ii).
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The Exchange believes it is appropriate that Portfolio Depositary
Receipts (Nasdaq Rule 5705(a)) and Index Fund Shares (Nasdaq Rule
5705(b)) are included in the Proposed Definition and, therefore,
entitled to the exemptions proposed herein because these securities are
currently exempt from the provisions of Nasdaq Rule 5605(b)
(Independent Directors), Nasdaq Rule 5605(d) (Compensation Committee
Requirements), Nasdaq Rule 5605(e) (Independent Director Oversight of
Director Nominations), Nasdaq Rule 5610 (Code of Conduct), and Nasdaq
Rule 5620(a) (Meetings of Shareholders).\17\
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\17\ See Nasdaq Rule 5615(a)(5) for the exemptions for Index
Fund Shares and Nasdaq Rule 5615(a)(1) for the exemptions regarding
Portfolio Depositary Receipts.
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The Exchange also believes it is appropriate that Equity Index-
Linked Securities (Nasdaq Rule 5710(k)(i)), Commodity-Linked Securities
(Nasdaq Rule 5710(k)(ii)), Fixed Income Index-Linked Securities (Nasdaq
Rule 5710(k)(iii)), Futures-Linked Securities (Nasdaq Rule
5710(k)(iv)), Multifactor Index-Linked Securities (Nasdaq Rule
5710(k)(v)), Index-Linked Exchangeable Notes (Nasdaq Rule 5711(a)) and
SEEDS (Nasdaq Rule 5715) are included in the Proposed Definition and,
therefore, entitled to the exemptions proposed herein because each are
separate forms of unsecured debt of an issuer that is already subject
to the corporate governance and annual meeting requirements of a
national securities exchange.\18\
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\18\ Nasdaq Rule 5730(a)(2), with which securities listed
pursuant to Nasdaq Rule 5710, 5711(a) and 5715 must comply, states,
in part, the issuers common stock or voting preferred stock, or
their equivalent ``must be listed on the Nasdaq Global Market,
Nasdaq Global Select Market or the New York Stock Exchange (NYSE) or
be an affiliate of a Company listed on the Nasdaq Global Market,
Nasdaq Global Select Market or the NYSE''.
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If the issuer is listed on Nasdaq, it is already subject to the
requirements of the Nasdaq Rule 5600 Series. If the issuer is listed on
the New York Stock Exchange LLC (``NYSE''), it is already subject to
corporate governance standards that are substantially similar to
Nasdaq's. In addition, Nasdaq believes that it is appropriate to exempt
these securities from the annual meeting requirements of Nasdaq Rule
5620(a) because the holders of these securities have economic interests
and other limited rights that do not include voting rights. Nasdaq
notes that these issuers may still be required to hold shareholder
meetings, including special meetings, as required by federal or state
law or their governing documents. The Exchange believes that exempting
these securities from the annual meeting requirements is consistent
with rules of other exchanges that were previously approved by the
Commission.\19\
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\19\ See Securities Exchange Act Release No. 57268 (February 4,
2008), 73 FR 7614 (February 8, 2008) (SR-Amex-2006-31).
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In addition, while unlike traditional debt securities, these
securities derive their value from the performance of an underlying
index or reference asset, they retain many of the same characteristics
as traditional debt securities \20\ and, therefore, the Exchange
believes it is consistent to treat them accordingly with regard to the
corporate governance and annual meeting requirements.\21\ The Exchange
notes that including these securities in the Proposed Definition and
thereby creating exemptions from certain provisions of Nasdaq Rule 5615
and the annual meeting requirements of Nasdaq Rule 5620(a), is
substantially similar to the Arca rules.\22\
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\20\ Like traditional debt securities, these securities are debt
of the issuer and have a specific date of maturity.
\21\ The Exchange notes that this is consistent with the
treatment of ``debt securities'' under Arca Rule 5.3-E (Corporate
Governance and Disclosure Policies).
\22\ See supra note 3.
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Similarly, the Exchange believes it is appropriate that Equity Gold
Shares (Nasdaq Rule 5711(b)) are included in the Proposed Definition
and, therefore, entitled to the exemptions proposed herein because like
such classes of derivative securities, Equity Gold Shares
[[Page 27819]]
are passive investment vehicles that hold a beneficial interest in a
specified commodity trust. In addition, Equity Gold Shares are treated
in a similar fashion to Index Fund Shares under the existing Nasdaq
rules.\23\ Therefore, the Exchange believes it is appropriate that
Equity Gold Shares are included in the Proposed Definition and,
therefore, entitled to the exemptions proposed herein as Index Fund
Shares are already exempt from certain provisions of the Nasdaq Rule
5600 series.\24\
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\23\ Rule 5711(b)(i) states that ``while Equity Gold Shares are
not technically Index Fund Shares and thus not are not covered by
Nasdaq Rule 5705, all other rules that reference ``Index Fund
Shares'' shall also apply to Equity Gold Shares.''
\24\ See infra notes 29 and 30.
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Additionally, the Exchange believes it is appropriate that Trust
Certificates (Rule 5711(c)) are included in the Proposed Definition
and, therefore, entitled to the exemptions proposed herein because
these securities represent an interest in a passive investment vehicle
that are issued by entities created solely to issue securities and
invest in the underlying index or reference assets. The trust does not
have a board of directors and the holders of Trust Certificates have no
voting rights, unless required under state law, with regard to
corporate matters, including election of trustees. Therefore, the
Exchange believes that Trust Certificates should be included in the
Proposed Definition and should not be subject to the annual meeting
requirements of Nasdaq Rule 5620(a). Nasdaq notes that these issuers
may still be required to hold shareholder meetings, including special
meetings, as required by federal or state law or their governing
documents. The Exchange notes that including these securities in the
Proposed Definition and thereby creating exemptions from certain
provisions of Nasdaq Rule 5615 and the annual meeting requirements of
Nasdaq Rule 5620(a), is substantially similar to the Arca rules.\25\
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\25\ See supra note 3.
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The Exchange also believes it is appropriate that Commodity-Based
Trust Shares (Nasdaq Rule 5711(d)), Currency Trust Shares (Nasdaq Rule
5711(e)), Commodity Index Trust Shares (Nasdaq Rule 5711(f)), and
Commodity Futures Trust Shares (Nasdaq Rule 5711(g)) are included in
the Proposed Definition and, therefore, entitled to the exemptions
proposed herein because shares of these securities are passive
investment vehicles that hold a beneficial interest in a specified
commodity trust that is not managed like a corporation and does not
have officers or a board of directors. These securities are already
exempt from Nasdaq Rule 5605(b) (Independent Directors), Nasdaq Rule
5605(d) (Compensation Committee Requirements), Nasdaq Rule 5605(e)
(Independent Director Oversight of Director Nominations), and Nasdaq
Rule 5610 (Code of Conduct).\26\ In addition, while shareholders may
have limited voting rights in certain circumstances, they do not have
the right to elect directors. Therefore, given the limited voting
rights, lack of directors or officers, and the passive nature of the
trust, the Exchange believes these securities should not be subject to
the annual meeting requirements of Nasdaq Rule 5620(a). Nasdaq notes
that these issuers may still be required to hold shareholder meetings,
including special meetings, as required by federal or state law or
their governing documents. The Exchange believes that these changes are
consistent with rules of other exchanges that were previously approved
by the Commission.\27\
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\26\ The Exchange interprets these securities to be currently
exempt pursuant to Nasdaq Rule 5615(a)(1) (Asset-backed Issuer and
Other Passive Issuers).
\27\ See supra note 19.
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The Exchange also believes that it is appropriate that Partnership
Units (Nasdaq Rule 5711(h)) are included in the Proposed Definition
and, therefore, entitled to the exemptions proposed herein because
Partnership Units are passive investment vehicles that hold a
beneficial interest in a specified partnership that is not managed like
a corporation and does not have a board of directors. In addition, the
Exchange believes Partnership Units should not be subject to the annual
meeting requirements of Nasdaq Rule 5620(a) because holders have
limited voting rights and the general partner oversees the operation of
the partnership. Nasdaq notes that these issuers may still be required
to hold shareholder meetings, including special meetings, as required
by federal or state law or their governing documents. The Exchange
believes that these changes are consistent with rules of other
exchanges that were previously approved by the Commission.\28\
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\28\ Id.
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Nasdaq believes it is appropriate that Trust Issued Receipts are
included in the Proposed Definition and, therefore, entitled to the
exemptions proposed herein because Trust Issued Receipts are passive
investment vehicles that hold a beneficial interest in a specified
partnership that is not managed like a corporation and does not have a
board of directors. In addition, the Exchange believes that Trust
Issued Receipts should not be subject to the annual meeting
requirements of Nasdaq Rule 5620(a) because these securities are
currently exempt from this rule.\29\
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\29\ See Nasdaq IM-5620.
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Nasdaq believes it is appropriate that Managed Fund Shares (Nasdaq
Rule 5735) are included in the Proposed Definition and, therefore,
entitled to the exemptions proposed herein because Managed Fund Shares
are currently exempt from the provisions of Nasdaq Rule 5605(b)
(Independent Directors), Nasdaq Rule 5605(d) (Compensation Committee
Requirements), Nasdaq Rule 5605(e) (Independent Director Oversight of
Director Nominations), and Nasdaq Rule 5610 (Code of Conduct).\30\ In
addition, Nasdaq believes that it is appropriate to exempt these
securities from the annual meeting requirements of Nasdaq Rule 5620(a)
because like Index Fund Shares (which are currently provided an
exemption from the annual meeting requirements of Nasdaq Rule
5620(a)),\31\ Managed Fund Shares are securities issued by an open-end
investment company registered under the 1940 Act that are available for
creation and redemption on a continuous basis, and require
dissemination of an intraday portfolio value. These requirements
provide important investor protections and ensure that the net asset
value and the market price remain closely tied to one another while
maintaining a liquid market for the security. These protections, along
with the disclosure documents regularly received by investors, allow
shareholders of Managed Fund Shares to value their holdings on an
ongoing basis and lessen the need for shareholders to directly deal
with management at an annual meeting. Therefore, Nasdaq further
believes it is appropriate that Managed Fund Shares be afforded the
proposed exemptions to the annual meeting requirements of Nasdaq Rule
5620(a). Nasdaq notes that these issuers may still be required to hold
shareholder meetings, including special meetings, as required by
federal or state law or their governing documents. As stated in a
[[Page 27820]]
previous Commission approval order,\32\ exchange-traded funds are
registered under, and remain subject to, the Investment Company Act of
1940 (``Investment Company Act''), which imposes various shareholder-
voting requirements that may be applicable to such funds.\33\
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\30\ See Nasdaq Rule 5615(a)(5).
\31\ See Securities Exchange Act Release No. 53578 (March 30,
2006), 71 FR 17532 (April 6, 2006) (SR-NASD-2005-073). As noted in
the filing, Nasdaq believes these exchange-traded funds are
generally passive investment vehicles that seek to match the
performance of an index and must obtain an exemptive order from the
Commission before they offer securities. As a result, Nasdaq notes
that the operations of the issuers of these securities are
circumscribed by numerous representations and conditions of the
applicable exemptive orders, and that the issuers of these
securities do not typically experience the need for operational or
other changes requiring a shareholder vote, and, by extension a
shareholder meeting.
\32\ See Securities Exchange Act Release No. 53578 (March 30,
2006), 71 FR 17532 (April 6, 2006) (SR-NASD-2005-073).
\33\ See e.g., Section 16 of the Investment Company Act, which
requires, among others, an investment company's initial board of
directors to be elected by the shareholders at an annual or special
meeting. 15 U.S.C. 80a-16(a).
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The Exchange also believes it is appropriate that NextShares
(Nasdaq Rule 5745) are included in the Proposed Definition and,
therefore, entitled to the exemptions proposed herein because
NextShares are already afforded exemptions from certain portions of the
Nasdaq Rule 5600 Series.\34\ In addition, Nasdaq believes it is
appropriate to provide NextShares an exemption from the annual meeting
requirements in Nasdaq Rule 5620(a) because like Index Fund Shares
(which are already provided an exemption from Nasdaq Rule 5620(a)),\35\
NextShares are securities issued by an open-end investment company
registered under the 1940 Act that are available for creation and
redemption on a continuous basis, and require dissemination of an
intraday portfolio value. These requirements provide important investor
protections and ensure that the net asset value and the market price
remain closely tied to one another while maintaining a liquid market
for the security. These protections, along with the disclosure
documents regularly received by investors, allow shareholders of
NextShares to value their holdings on an ongoing basis and lessen the
need for shareholders of NextShares to deal directly with management at
an annual meeting. Therefore, Nasdaq believes it is appropriate that
NextShares be afforded the proposed exemptions from certain provisions
of Nasdaq Rule 5615 and the annual meeting requirements of Nasdaq Rule
5620(a). Nasdaq notes that these issuers may still be required to hold
shareholder meetings, including special meetings, as required by
federal or state law or their governing documents.
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\34\ See supra note 30.
\35\ See supra note 29.
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The Exchange specifically does not propose that securities listed
pursuant to Nasdaq Rule 5730 (Listing Requirements for Securities Not
Otherwise Specified (Other Securities)) are included in the Proposed
Definition and, therefore, entitled to the exemptions proposed herein
because the characteristics of these securities are unknown and
therefore the Exchange cannot determine whether allowing exemptions to
the Rule 5600 Series is appropriate. In addition, the Exchange does not
propose that Trust Units (Nasdaq Rule 5711(i)), Currency Warrants
(Nasdaq Rule 5711(k)), Alpha Index-Linked Securities (Nasdaq Rule
5712), Paired Class Shares (Nasdaq Rule 5713) or Index Warrants (Nasdaq
Rule 5725) are included in the Proposed Definition and, therefore,
entitled to the exemptions proposed herein, as the Exchange does not
anticipate listing such securities in the near future.\36\ The proposed
rule language will also clearly indicate that products included in the
Proposed Definition are subject to certain exemptions under the Nasdaq
Rule 5600 Series.
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\36\ Should the Exchange list Trust Units, Currency Warrants,
Alpha Index-Linked Securities Paired Class Shares or Index Warrants
in the future, it may consider whether to amend its rules at that
time to allow for certain corporate governance exclusions applicable
to such classes of securities.
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As noted above, Nasdaq Rule 5615 sets forth exemptions from the
corporate governance requirements in the Nasdaq Rule 5600 series for
certain companies. For example, Nasdaq Rule 5615(a)(1) exempts asset-
backed issuers and other passive issuers from the requirements of
Nasdaq Rule 5605(b) (Independent Directors), Nasdaq Rule 5605(d)
(Compensation Committee Requirements), Nasdaq Rule 5605(e) (Independent
Director Oversight of Director Nominations), and Nasdaq Rule 5610 (Code
of Conduct).\37\
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\37\ Nasdaq Rule 5615(a)(1) also provides exemptions for Nasdaq
Rule 5605(c) (Audit Committee) and Nasdaq Rule 5615(c) (Controlled
Company Exemption). See also note 12 and accompanying text for
descriptions of additional exemptions provided under Nasdaq Rule
5615(a)(5).
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The Exchange proposes to amend Nasdaq Rule 5615(a)(5) by removing
references to Index Fund Shares, Managed Fund Shares, and NextShares
and including these securities in the Proposed Definition. These
changes will conform the exemptions from the Nasdaq Rule 5600 Series
that are afforded to management investment companies \38\ with the
exemptions under the Arca Rules for Index Fund Shares and Managed Fund
Shares.\39\ The Exchange believes that these changes are consistent
with those previously approved by the Commission.\40\
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\38\ The Exchange notes that business development companies (as
defined in Nasdaq IM-5615-4) will remain subject to all of the
requirements of Nasdaq Rule 5600.
\39\ See supra note 3.
\40\ See Securities Exchange Act Release No. 49810 (June 4,
2004), 69 FR 32647 (June 10, 2004) (SR-PCX-2003-35).
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The Exchange proposes to add new Nasdaq Rule 5615(a)(6). Nasdaq
Rule 5615(a)(6)(A) will provide that issuers listing only non-voting
preferred securities, debt securities, or Derivative Securities are
exempt from Nasdaq Rule 5605(b) (Independent Directors), Nasdaq Rule
5605(c) (Audit Committee Requirements, except for the applicable
provisions of SEC Rule 10A-3 as discussed below), Nasdaq Rule 5605(d)
(Compensation Committee Requirements), Nasdaq Rule 5605(e) (Independent
Director Oversight of Director Nominations), Nasdaq Rule 5610 (Code of
Conduct), and Nasdaq Rule 5620(a) (Meetings of Shareholders).\41\
However, Nasdaq Rule 5615(a)(6)(A) will continue to require such
companies to comply with the requirements of Nasdaq Rule 5625, pursuant
to which an issuer will provide Nasdaq with prompt notification after
an executive officer of the company becomes aware of any noncompliance
by the company with the requirements of the Nasdaq Rule 5600 Series.
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\41\ Nasdaq notes that the rule proposal for the recently
approved Listing Rule 5702 (Corporate Bonds) included plans to seek
exemptions to certain requirements of the Nasdaq Rule 5600 Series.
Nasdaq would consider Corporate Bonds to be ``debt securities'' for
the purpose of the exemptions proposed herein. Similar to Linked
Securities, Corporate Bonds are non-convertible debt of an issuer
and have to have a class of equity listed on an exchange. In the
case of Corporate Bonds, the equity must be listed on Nasdaq, NYSE
American or NYSE. In addition, Nasdaq does not propose to exempt
Corporate Bonds from Nasdaq Rule 5630 (Review of Related Party
Exemptions), Nasdaq Rule 5635 (Shareholder Approval), or Nasdaq Rule
5640 (Voting Rights) as stated in the rule proposal for Nasdaq Rule
5702. (See Securities Exchange Act Release No. 84575 (November 13,
2018), 83 FR 58309 (November 19, 2018) (SR-NASDAQ-2018-070)).
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Consistent with the existing exemptions available for certain other
securities listed pursuant to the Nasdaq Rule 5700 Series, these
issuers must comply with the applicable provisions of SEC Rule 10A-3
\42\ and the proposed rule will specifically state that
requirement.\43\ The proposed rule thereby applies the requirements of
SEC Rule 10A-3 to the issuer's audit committee. As noted above, the
proposed rule also imposes on the
[[Page 27821]]
issuer the obligation to promptly notify Nasdaq after an executive
officer of the issuer becomes aware of any noncompliance by the issuer
with the requirements of the Nasdaq Rule 5600 series, including
noncompliance with the audit committee provisions that are required by
SEC Rule 10A-3 and which are set forth in Nasdaq Rule 5605(c).
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\42\ 17 CFR 240.10A-3.
\43\ Nasdaq Rule 5615(a)(5) states, in part, ``. . . management
investment companies that issue Index Fund Shares, Managed Fund
Shares, and NextShares, as defined in Rules 5705(b), 5735, and 5745
are exempt from the Audit Committee requirements set forth in Rule
5605(c), except for the applicable requirements of SEC Rule 10A-3.''
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This proposed change will conform Nasdaq's treatment of these
issuers with that of existing Arca requirements.\44\ The proposed rule
will also state that an issuer that has non-voting preferred
securities, debt securities, or Derivative Securities listed on the
Exchange that also lists its common stock or voting preferred stock or
their equivalent on Nasdaq will be subject to all the requirements of
the Nasdaq 5600 Rule Series. Nasdaq also proposes to add the Proposed
Definition as Nasdaq Rule 5615(a)(6)(B).
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\44\ See supra note 3.
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Finally, the Exchange proposes to amend Nasdaq IM-5620 to amend the
annual meeting requirements of Nasdaq Rule 5620(a) to clarify that
issuers of only non-voting preferred securities, debt securities or
Derivative Securities \45\ are not subject to the rule. The Exchange
believes that the proposed amendment is appropriate because the holders
of non-voting preferred securities, debt securities or Derivative
Securities do not have voting rights with respect to the election of
directors except in very limited circumstances as required by federal
or state law or their governing documents.\46\ The existing provisions
of Nasdaq IM-5620 already provide exemptions for securities that are
the same or similar to the securities proposed for inclusion in the
Proposed Definition.\47\ The rule will continue to state that if the
Company also lists common stock or voting preferred stock, or their
equivalent, on Nasdaq, the Company will be subject to the annual
meeting requirements of Nasdaq Rule 5620.\48\ The Exchange notes that
the proposed changes are substantially similar to Arca
requirements.\49\
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\45\ The Exchange is proposing to expand the list of products
that are exempt from the annual meeting requirements of Nasdaq Rule
5620(a). The proposed list of products consists of Portfolio
Depository Receipts and Index Fund Shares (Rule 5705); Equity Index-
Linked Securities (Rule 5710(k)(i)), Commodity-Linked Securities
(Rule 5710(k)(ii)), Fixed Income Index-Linked Securities
(5710(k)(iii)), Futures-Linked Securities (5710(k)(iv)), Multifactor
Index-Linked Securities (5710(k)(v)), Index-Linked Exchangeable
Notes (Rule 5711(a)), Equity Gold Shares (Rule 5711(b)), Trust
Certificates (Rule 5711(c)), Commodity-Based Trust Shares (Rule
5711(d)), Currency Trust Shares (Rule 5711(e)), Commodity Index
Trust Shares (Rule 5711(f)), Commodity Futures Trust Shares (Rule
5711(g)), Partnership Units (Rule 5711(h)), Managed Trust Securities
(Rule 5711(j)), SEEDS (Rule 5715), Trust Issued Receipts (Rule
5720), Managed Fund Shares (Rule 5735), and NextShares (Rule 5745).
Portfolio Depositary Receipts, Index Fund Shares and Trust Issued
Receipts are currently excluded from the annual meeting requirement
in Nasdaq Rule 5620(a).
\46\ See supra discussion regarding Derivative Securities, pp.
7-17.
\47\ See supra note 29.
\48\ Nasdaq notes that closed-end management investment
companies will still be subject to the annual meeting requirements
of Nasdaq Rule 5620.
\49\ See supra note 3.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\50\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\51\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster competition
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
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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\50\ 15 U.S.C. 78f(b).
\51\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed amendments to: (i) Amend
Nasdaq Rule 5615; (ii) add a definition for ``Derivative Securities''
applicable only to the Nasdaq Rule 5600 Series; (iii) detail the
exemptions available to issuers that only list non-voting preferred
securities, debt securities, and Derivative Securities; and (iv) amend
Nasdaq IM-5620 to update the exemptions from the annual meeting
requirements to include issuers that only list non-voting preferred
securities, debt securities, and Derivative Securities, are consistent
with the protection of investors.
Nasdaq believes that the proposed exemptions for issuers of only
non-voting preferred stock, debt securities and Derivative Securities
are consistent with the protection of investors, as the holders of
these securities do not have voting rights with respect to the election
of directors, except in very limited circumstances, as required by
state or federal law or their governing documents. Moreover, such
securities are generally issued by an entity that is either (i)
structured solely as vehicles for the issuance of non-voting or
derivative securities, or (ii) issued by an operating company primarily
listed on a national securities exchange and therefore subject to the
full corporate governance and annual meeting requirements of that
exchange.\52\
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\52\ See supra note 18.
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Additionally, the net asset value of Derivative Securities that the
Exchange proposes to exclude from its annual meeting requirement is
determined by the market price of each fund's underlying securities or
other reference asset. Shareholders of such securities products listed
on the Exchange receive regular disclosure documents describing the
pricing mechanism for their securities and detailing how they can value
their holdings. Accordingly, holders of such securities can value their
investment on an ongoing basis. Because of these factors, Nasdaq
believes there is a reduced need for shareholders to engage with
management of issuers of these securities and thus no need for the
issuers of such securities to hold annual shareholder meetings absent
the existence of other listed securities with director election voting
rights. Further, although the Exchange proposes to exclude issuers of
such securities from holding an annual meeting, such issuers may still
be required to hold special meetings as required by state or federal
law or their governing documents. The Exchange believes that issuers of
only non-voting preferred stock, debt securities and Derivative
Securities are excluded from complying with substantially similar
requirements on other national securities exchanges.\53\
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\53\ The Proposed Definition is substantially similar to
securities deemed to be ``derivative and special purpose
securities'' pursuant to Arca Rule 5.3-E.
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An issuer that has non-voting preferred stock, debt securities and
Derivative Securities listed on the Exchange that also lists the
issuers common stock or voting preferred stock or their equivalent on
Nasdaq will be subject to all the requirements of the Nasdaq Rule 5600
Series. Also, the Exchange notes that although NextShares (Nasdaq Rule
5745) are included in the new definition for ``Derivative Securities,''
Arca rules do not include an equivalent product. However, Nasdaq
believes that that the inclusion of NextShares in the Proposed
Definition is consistent with the protection of investors because like
Index Fund Shares (which are currently exempt from many of the
corporate governance and annual meeting requirements of the Nasdaq 5600
Rule Series),\54\ NextShares are securities issued by an open-end
investment company registered under the 1940 Act that are available for
creation and redemption on a continuous basis, and require
dissemination of an intraday portfolio value. In addition, NextShares
are already exempt from portions of the
[[Page 27822]]
Nasdaq Rule 5600 Series as well as subject to the same filing and
disclosure requirements as Index Fund Shares.
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\54\ See supra notes 29 and 30.
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Nasdaq also believes that the addition of a definition for
``Derivative Securities'' applicable to the Nasdaq Rule 5600 Series
will improve the clarity of the rules and reduce possible investor
confusion.
For the reasons stated herein, the Exchange believes the proposed
amendments provide appropriate levels of investor protections,
consistent with the investor protection requirement of Section 6(b)(5),
and would conform the listing standards across exchanges resulting in
enhanced competition among markets and removing an impediment to a free
and open market and national market system.
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 not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Instead, Nasdaq
believes that the proposed rule change to conform Nasdaq Rule 5615(a)
and Nasdaq Rule 5620(a) so that they are substantially similar to Arca
Rule 5.3-E may enhance competition since Nasdaq and Arca will have
substantially similar listing requirements for these issuers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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 for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \55\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\56\
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\55\ 15 U.S.C. 78s(b)(3)(A)(iii).
\56\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the 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 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:
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-NASDAQ-2019-039 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-NASDAQ-2019-039. 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-NASDAQ-2019-039, and should be submitted
on or before July 5, 2019.
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\57\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-12542 Filed 6-13-19; 8:45 am]
BILLING CODE 8011-01-P