[Federal Register Volume 85, Number 196 (Thursday, October 8, 2020)]
[Notices]
[Pages 63597-63599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22248]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90075; File No. SR-NYSEArca-2020-56]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Amend NYSE Arca Rules 5.2-E(j)(3), 5.2-E(j)(8), 5.5-
E(g)(2), 8.600-E, and 8.900-E

October 2, 2020.
    On June 18, 2020, 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 certain listing requirements relating to 
maintaining a minimum number of beneficial holders and minimum number 
of shares outstanding. The proposed rule change was published for 
comment in the Federal Register on July 7, 2020.\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. 89197 (June 30, 
2020), 85 FR 40720 (``Notice'').
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    On August 17, 2020, 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. The Commission is issuing this order to institute 
proceedings pursuant to 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. 89584, 85 FR 51817 
(August 21, 2020). The Commission designated October 5, 2020 as the 
date by which the Commission shall approve or 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. Description of the Proposal

    The Exchange proposes to amend NYSE Arca Rules 5.2-E(j)(3) and 5.5-
E(g)(2) (Investment Company Units), 5.2-E(j)(8) (Exchange-Traded Fund 
Shares), 8.600-E (Managed Fund Shares), and 8.900-E (Managed Portfolio 
Shares) (collectively, ``Fund Shares'') to (1) remove the listing 
requirement that, following the initial twelve-month period after 
commencement of trading of a series of Investment Company Units, 
Exchange-Traded Fund Shares, Managed Fund Shares or Managed Portfolio 
Shares, respectively, on the Exchange, such series have at least 50 
beneficial holders, and (2) replace the existing minimum number of 
shares requirements \7\ with a requirement that a series of Fund Shares 
have at least one creation unit outstanding on an initial and continued 
listing basis.\8\
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    \7\ See Commentary .01(d) to NYSE Arca Rule 5.2-E(j)(3) 
(requiring a minimum of 100,000 shares of a series of Investment 
Company Units to be outstanding at commencement of trading); NYSE 
Arca Rule 5.2-E(j)(8)(e)(1)(A) (requiring the Exchange to establish 
a minimum number of Exchange-Traded Fund Shares to be outstanding at 
the time of commencement of trading); NYSE Arca Rule 8.600-
E(d)(1)(A) (requiring the Exchange to establish a minimum number of 
Managed Fund Shares to be outstanding at the time of commencement of 
trading); and NYSE Arca Rule 8.900-E(d)(1)(A) (requiring the 
Exchange to establish a minimum number of Managed Portfolio Shares 
to be outstanding at the time of commencement of trading).
    \8\ The Exchange represents that the term ``creation unit'' 
would have the same meaning as defined in Rule 6c-11(a)(1) under the 
Investment Company Act of 1940 (``1940 Act'').
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    The Exchange believes that the requirement that a series of Fund 
Shares listed on the Exchange must have at least 50 beneficial 
shareholders is no longer necessary. The Exchange believes that the 
requirements of Rule 6c-11 under the 1940 Act and, in particular, the 
website disclosure requirements of Rule 6c-11(c), together with the 
existing creation and redemption process, serve to mitigate the risks 
of manipulation and lack of liquidity that the shareholders requirement 
was intended to address. The Exchange further believes that requiring 
at least one creation unit to be outstanding at all times, together 
with the enhanced disclosure requirements of Rule 6c-11, will 
facilitate an effective arbitrage mechanism that, for Investment 
Company Units, Managed Fund Shares, and Exchange-Traded Fund Shares, 
will provide investors with sufficient transparency into the holdings 
of the underlying portfolio and help ensure that the trading price in 
the secondary market remains in line with the value per share of a 
fund's portfolio. As an example, the Exchange notes that Rule 6c-
11(c)(1)(vi) requires additional disclosure if the premium or discount 
is in excess of 2% for more than seven consecutive days, so that there 
would be transparency to investors in the event there are indications 
of an inefficient arbitrage mechanism.
    With respect to Managed Portfolio Shares, while these securities do 
not publicly disclose their portfolio holdings daily and are not 
eligible to rely on Rule 6c-11, the Exchange believes that the 
applicable Verified Intraday Indicative Value and other information 
required to be disseminated in connection with the listing and trading 
of Managed Portfolio Shares ensures transparency of key values and 
information, and that such information is sufficient to support an 
effective arbitrage process, independent of any minimum shareholders 
requirement.
    The Exchange states that the arbitrage mechanism generally causes 
the market price and the net asset value per share to align, and the 
functioning of the arbitrage mechanism helps to ensure that the trading 
price in the secondary market is at fair value. The Exchange further 
states that the existence of the creation and redemption process, as 
well as the proposed requirement that at least one creation unit is 
always

[[Page 63598]]

outstanding, would ensure that market participants are able to redeem 
Fund Shares and, thereby, allow the arbitrage mechanism to function 
properly. The Exchange believes, therefore, that such arbitrage 
mechanism would obviate the need for a minimum shareholders requirement 
to support a fair and orderly market in Fund Shares. In addition, the 
Exchange states that its surveillance procedures for Fund Shares and 
its ability to halt trading in Fund Shares in specified circumstances 
provide for additional investor protections by further mitigating any 
abnormal trading that would affect the Fund Shares' prices.

II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2020-56 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \9\ 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.
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    \9\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\10\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of and input concerning the proposed rule change's consistency 
with the Act and, in particular, 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, 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; and are not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.'' \11\
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    \10\ Id.
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission has consistently recognized the importance of the 
minimum number of holders and other similar requirements in exchange 
listing standards. Among other things, such listing standards help 
ensure that exchange listed securities have sufficient public float, 
investor base, and trading interest to provide the depth and liquidity 
necessary to promote fair and orderly markets.\12\
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    \12\ See, e.g., Securities Exchange Act Release No. 57785 (May 
6, 2008), 73 FR 27597 (May 13, 2008) (SR-NYSE-2008-17) (stating that 
the distribution standards, which includes exchange holder 
requirements ``. . . should help to ensure that the [Special Purpose 
Acquisition Company's] securities have sufficient public float, 
investor base, and liquidity to promote fair and orderly markets''); 
Securities Exchange Act Release No. 86117 (June 14, 2019), 84 FR 
28879 (June 20, 2018) (SR-NYSE-2018-46) (disapproving a proposal to 
reduce the minimum number of public holders continued listing 
requirement applicable to Special Purpose Acquisition Companies from 
300 to 100).
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    As discussed above, the Exchange is proposing to (1) remove the 
listing requirement that, following the initial twelve-month period 
after commencement of trading of a series of Fund Shares on the 
Exchange, such series have at least 50 beneficial holders, and (2) 
replace the existing minimum number of shares requirements with a 
requirement that a series of Fund Shares have at least one creation 
unit outstanding on an initial and continued listing basis. In support 
of its proposal, the Exchange asserts that, for Investment Company 
Units, Exchange-Traded Fund Shares and Managed Fund Shares, the 
portfolio and other disclosure requirements of Rule 6c-11 under the 
1940 Act, together with the requirement that there be at least one 
creation unit outstanding, would facilitate efficient arbitrage and 
mitigate the manipulation and liquidity risks that the minimum number 
of beneficial holders requirement was intended to address. With respect 
to Managed Portfolio Shares, the Exchange asserts that the existing 
requirement to disseminate the Verified Intraday Indicative Value and 
related information supports an effective arbitrage process and 
achieves those goals. The Exchange also believes its surveillance 
procedures and trading halt authority would further mitigate regulatory 
concerns. The Exchange does not specifically address the proposed 
elimination of its existing minimum number of shares requirements.
    While the Exchange takes the position that existing disclosure 
requirements, together with the creation and redemption process, 
sufficiently mitigate the risks of manipulation and lack of liquidity 
that the minimum shareholders requirement was intended to address, the 
Exchange does not explain in any detail the basis for this view, 
particularly if a series of Fund Shares is permitted to have a very 
small number of beneficial holders. For example, the Exchange does not 
address how the arbitrage mechanism will assure Fund Shares with very 
few holders are sufficiently liquid to support fair and orderly 
markets. The Exchange also does not discuss potential inefficiencies in 
the arbitrage mechanism that might occur with illiquid Fund Shares that 
have very few holders, and the impact that would have on the ability of 
the arbitrage mechanism to effectively mitigate the risks of 
manipulation. Further, the Exchange does not address the impact of 
creation unit size on the efficiency of the arbitrage mechanism (e.g., 
illiquid Fund Shares with very few holders and a large creation unit 
size). The Exchange provides no data or analysis to support its 
position, other than noting the number and size of the creation units 
for existing series of Fund Shares.
    The Exchange provides no specific arguments to support the proposed 
elimination of its existing minimum number of shares requirements. 
While the Exchange proposes to replace those requirements with a 
requirement that a series of Fund Shares have a number of shares 
outstanding equal to at least one creation unit, the Exchange does not 
explain why this is an appropriate substitute for its existing 
standards. Creation unit sizes could be highly variable, since they are 
determined at the discretion of the issuer of Fund Shares, and the 
Exchange has not articulated how this new standard would effectively 
support fair and orderly markets, address the risks of manipulation, 
and otherwise be consistent with Section 6(b)(5) and other relevant 
provisions of the Act.
    Finally, the Exchange takes the position that its surveillance 
procedures and trading halt authority for Fund Shares would further 
mitigate regulatory concerns. The Exchange, however, does not explain 
in any detail the basis for this view, or how specifically these 
existing procedures would effectively mitigate the risks addressed by 
the minimum number of beneficial holders and minimum number of shares 
requirements the Exchange is proposing to eliminate.
    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
self-regulatory organization [`SRO'] that proposed the rule change.'' 
\13\ The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable

[[Page 63599]]

requirements must all be sufficiently detailed and specific to support 
an affirmative Commission finding, and any failure of an SRO to provide 
this information may result in the Commission not having a sufficient 
basis to make an affirmative finding that a proposed rule change is 
consistent with the Exchange Act and the applicable rules and 
regulations.\14\
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    \13\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \14\ See id.
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    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Act to 
determine whether the proposal should be approved or disapproved.

IV. Commission's Solicitation of 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.\15\
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    \15\ 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 October 29, 2020. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 12, 2020. 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,\16\ in addition to any other 
comments they may wish to submit about the proposed rule change.
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    \16\ See 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-2020-56 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-2020-56. 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-2020-56 and should be submitted 
by October 29, 2020. Rebuttal comments should be submitted by November 
12, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-22248 Filed 10-7-20; 8:45 am]
BILLING CODE 8011-01-P