[Federal Register Volume 89, Number 85 (Wednesday, May 1, 2024)]
[Notices]
[Pages 35252-35255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09328]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100032; File No. SR-CboeBZX-2023-062]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Disapproving a Proposed Rule Change To Amend the Initial Period After 
Commencement of Trading of a Series of Exchange-Traded Fund Shares on 
the Exchange as It Relates to the Holders of Record and/or Beneficial 
Holders, as Provided in Exchange Rule 14.11(l)

April 25, 2024.

I. Introduction

    On August 14, 2023, Cboe BZX Exchange, Inc. (``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the continued listing 
requirement applicable to Exchange-Traded Fund Shares (``ETF Shares'') 
relating to holders of record and/or beneficial holders pursuant to BZX 
Rule 14.11(l). The proposed rule change was published for comment in 
the Federal Register on September 1, 2023.\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. 98231 (August 28, 
2023), 88 FR 60516 (``Notice'').
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    On September 25, 2023, pursuant to Section 19(b)(2) of the Exchange 
Act, 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.\4\ On November 14, 2023, the Commission instituted 
proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act \5\ to 
determine whether to approve or disapprove the proposed rule change.\6\ 
On February 13, 2024, the Commission designated a longer period for 
Commission action on the proposed rule change.\7\ The Commission has 
received no comments on the proposed rule change.
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    \4\ See Securities Exchange Act Release No. 98497, 88 FR 67397 
(September 29, 2023).
    \5\ 15 U.S.C. 78s(b)(2)(B).
    \6\ See Securities Exchange Act Release No. 98933, 88 FR 80783 
(November 20, 2023) (``OIP'').
    \7\ See Securities Exchange Act Release No. 99530, 89 FR 12891 
(February 20, 2024).
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    This order disapproves the proposed rule change because, as 
discussed below, BZX has not met its burden under the Exchange Act and 
the Commission's Rules of Practice to demonstrate that its proposal is 
consistent with the requirements of Exchange Act Section 6(b)(5), and, 
in particular, the requirement that the rules of a national securities 
exchange be designed ``to prevent fraudulent and manipulative acts and 
practices'' and ``to protect investors and the public interest.'' \8\
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    \8\ 15 U.S.C. 78f(b)(5).
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II. Description of the Proposal 9
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    \9\ On April 29, 2020, BZX filed a proposed rule change to 
extend the Non-Compliance Period (as defined herein) in the 
Beneficial Holders Rule (as defined herein) from 12 months after 
commencement of trading on the Exchange to 36 months after 
commencement of trading on the Exchange for certain exchange-traded 
products, including a series of ETF Shares. See Securities Exchange 
Act Release No. 88795 (May 1, 2020), 85 FR 27254 (SR-CboeBZX-2020-
036) (``Prior PRC Notice'' or ``prior proposal''). The Commission 
disapproved the prior proposal, finding that the Exchange failed to 
satisfy its burden to demonstrate that the proposed rule change is 
consistent with the Exchange Act and the rules and regulations 
issued thereunder. See Securities Exchange Act Release No. 90819 
(December 29, 2020), 86 FR 332 (January 5, 2021) (SR-CboeBZX-2020-
036) (``Prior Disapproval Order''). In the current proposed rule 
change, BZX proposes the same extension of the Non-Compliance Period 
in the Beneficial Holders Rule from 12 months after commencement of 
trading on the Exchange to 36 months after commencement of trading 
on the Exchange, but only with respect to ETF Shares.
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    As described in detail in the Notice and OIP, a continued listing

[[Page 35253]]

requirement under BZX Rule 14.11(l) for ETF Shares \10\ currently 
provides that, following the initial 12-month period after commencement 
of trading on the Exchange, the Exchange will consider the suspension 
of trading in, and will commence delisting proceedings for, a series of 
ETF Shares for which there are fewer than 50 beneficial holders for 30 
or more consecutive trading days (``Beneficial Holders Rule''). The 
Exchange is proposing to change the date after which a series of ETF 
Shares must have at least 50 beneficial holders or be subject to 
delisting proceedings under the Beneficial Holders Rule (``Non-
Compliance Period''). Specifically, the Exchange seeks to extend the 
Non-Compliance Period in the Beneficial Holders Rule from 12 months 
after commencement of trading on the Exchange to 36 months after 
commencement of trading on the Exchange.
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    \10\ BZX Rule 14.11(l)(3)(A) defines ETF Shares as shares of 
stock issued by an Exchange-Traded Fund. The term ``Exchange-Traded 
Fund'' has the same meaning as the term ``exchange-traded fund'' 
defined in Rule 6c-11 under the Investment Company Act of 1940. See 
BZX Rule 14.11(l)(3)(B).
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    The Exchange asserts that it would be appropriate to increase the 
Non-Compliance Period from 12 months to 36 months because: (1) it would 
bring the rule more in line with the life cycle of an exchange-traded 
product (``ETP''); \11\ (2) the economic and competitive structures in 
place in the ETP ecosystem naturally incentivize issuers to delist 
products rather than continuing to list products that do not garner 
investor interest; and (3) extending the period from 12 to 36 months 
will not meaningfully impact the manipulation concerns that the 
Beneficial Holders Rule is intended to address.
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    \11\ A series of ETF Shares is a type of ETP.
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    According to the Exchange, the ETP space is more competitive than 
it has ever been, with more than 2,000 ETPs listed on exchanges. As a 
result, distribution platforms have become more restrictive about the 
ETPs they will allow on their systems, often requiring a minimum track 
record (e.g., twelve months) and a minimum level of assets under 
management (e.g., $100 million). Many larger entities also require a 
one-year track record before they will invest in an ETP. In the 
Exchange's view, this has slowed the growth cycle of the average ETP, 
with the result that the Exchange has seen a significant number of 
deficiencies with respect to the Beneficial Holders Rule over the last 
several years. Specifically, the Exchange states that it has issued 
deficiency notifications to 39 ETPs for non-compliance with the 
Beneficial Holders Rule since 2015. Of those 39 ETPs, 30 ultimately 
were able to achieve compliance while undergoing the delisting process. 
According to the Exchange, this data shows that a 12-month threshold is 
an inappropriately short time frame and only serves as a regulatory and 
administrative burden for issuers that must remediate if they fall out 
of compliance.
    In addition, the Exchange believes that the economic and 
competitive structures in place in the ETP ecosystem naturally 
incentivize issuers to delist products with insufficient investor 
interest, and that the Beneficial Holders Rule has resulted in the 
forced termination of ETPs that issuers believed were still 
economically viable. The Exchange states that there are significant 
costs associated with the launch and continued operation of an ETP, and 
notes that the Exchange has had 148 products voluntarily delist since 
2018. The Exchange also questions whether the number of beneficial 
holders is a meaningful measure of market interest in an ETP and 
believes that an ETP issuer is incentivized to have as many beneficial 
holders as possible.
    The Exchange states that the proposal ``does not create any 
significant change in the risk of manipulation for ETF Shares listed on 
the Exchange.'' \12\ The Exchange contends that a time extension to 
meet the requirement would present no new issues because any risk that 
is present during months 12 through 36 of initial listing would also be 
present during the first 12 months.\13\ The Exchange also states that 
it has in place a robust surveillance program for ETPs that it believes 
is sufficient to deter and detect manipulation and other violative 
activity, and that the Exchange (or the Financial Industry Regulatory 
Authority on its behalf) communicates as needed with other members of 
the Intermarket Surveillance Group. The Exchange believes that its 
surveillance procedures will act to mitigate any manipulation concerns 
that arise from extending the compliance period for the Beneficial 
Holders Rule from 12 months to 36 months.\14\
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    \12\ See Notice, supra note 3, 88 FR at 60518.
    \13\ See id.
    \14\ See id.
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    Lastly, the Exchange takes the position that other continued 
listing standards (e.g., the disclosure obligations applicable under 
Rule 6c-11 of the Investment Company Act of 1940 for series of ETF 
Shares) are generally sufficient to mitigate manipulation concerns 
associated with ETF Shares.\15\
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    \15\ See id.
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III. Discussion and Commission Findings

    The Commission must consider whether BZX's proposal is consistent 
with Section 6(b)(5) of the Exchange Act, which requires, in relevant 
part, that the rules of a national securities exchange be designed ``to 
prevent fraudulent and manipulative acts and practices'' and ``to 
protect investors and the public interest.'' \16\ 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.'' \17\
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    \16\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are 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 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, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78(f)(b)(5).
    \17\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\18\ 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

[[Page 35254]]

applicable rules and regulations.\19\ Moreover, ``unquestioning 
reliance'' on an SRO's representations in a proposed rule change is not 
sufficient to justify Commission approval of a proposed rule 
change.\20\
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    \18\ See id.
    \19\ See id.
    \20\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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    The Commission has consistently recognized the importance of the 
Beneficial Holders Rule and other similar requirements, stating that 
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.\21\ As stated by the Exchange, the Beneficial Holders Rule is 
intended to ensure that trading in ETF Shares is not susceptible to 
manipulation.\22\
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    \21\ 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). See also Prior Disapproval Order, supra note 9, 86 FR 
at 334.
    \22\ See Notice, supra note 3, 88 FR at 60518. See also Prior 
PRC Notice, supra note 9, 85 FR at 27255.
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    As discussed above, the Exchange is proposing to increase the Non-
Compliance Period from 12 months to 36 months, thereby extending by two 
years the length of time during which ETF Shares listed on the Exchange 
would have no requirement to have a minimum number of beneficial 
holders. In support of its proposal, the Exchange states that some ETPs 
have had difficulty complying with the Beneficial Holders Rule,\23\ and 
that the existing Beneficial Holders Rule forces the delisting of ETPs 
that issuers believe may still be economically viable.\24\ However, the 
Exchange does not sufficiently support its assertion that compliance 
with the Beneficial Holders Rule is especially difficult for ETF Shares 
or that any such compliance difficulties have led to the delisting of 
economically viable ETPs. For example, BZX states that it has issued 
deficiency notifications to 39 series of ETPs for noncompliance with 
the Beneficial Holders Rule since 2015 and, of those 39 series, 30 
attained compliance after issuance of the deficiency notice.\25\ These 
data indicate that, at most, the Exchange delisted nine series of ETPs 
over eight years for non-compliance with this requirement. However, BZX 
has not established how many (if any) of those nine series of ETPs were 
ETF Shares \26\ or that they were delisted solely for non-compliance 
with the Beneficial Holders Rule.\27\
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    \23\ Although the Exchange's proposed rule change is focused on 
ETF Shares, the Exchange's discussion refers to ETPs more generally.
    \24\ See Notice, supra note 3, 88 FR at 60518.
    \25\ See id. at 60517.
    \26\ As noted above, ETF Shares are a subset of ETPs. See id. at 
60517, n.7. Additionally, BZX does not disclose how many of those 9 
delistings occurred after April 6, 2020, when the Commission 
approved the adoption of BZX Rule 14.11(l), which permits the 
listing and trading of ETF Shares on the Exchange. See Securities 
Exchange Act Release No. 88566 (April 6, 2020), 85 FR 20312 (April 
10, 2020) (SR-CboeBZX-2019-097).
    \27\ BZX did not establish that the nine delisted issues 
complied with all other applicable listing requirements, and 
therefore were delisted only because of their non-compliance with 
the Beneficial Holders Rule.
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    Additionally, the Exchange does not sufficiently explain why any 
such compliance difficulties, or the need to remediate the applicable 
deficiencies, justify tripling the Non-Compliance Period for this core 
quantitative listing standard from one year to three years, and 
permitting ETF Shares to trade on the Exchange for an additional two 
years without the protections described above that the Beneficial 
Holders Rule was designed to provide. For example, the Exchange states 
that no new manipulation concerns would arise with a longer Non-
Compliance Period than a shorter one because any risk that is present 
during months 12 through 36 of initial listing would also be present 
during the first 12 months as provided under current rules.\28\ 
However, the Exchange does not address why tripling the period during 
which the same regulatory risks posed by a Non-Compliance Period would 
be present is consistent with the Exchange Act. As discussed above, the 
Beneficial Holders Rule and other minimum number of holders 
requirements are important to ensure that trading in exchange listed 
securities is fair and orderly and not susceptible to manipulation, and 
the Exchange does not explain why it is consistent with the Exchange 
Act to permit ETF Shares to trade for two additional years without any 
of the protections of investors and the public interest provided by the 
Beneficial Holders Rule.
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    \28\ See Notice, supra note 3, 88 FR at 60518.
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    Finally, while the Exchange asserts that existing surveillances and 
other listing standards are sufficient to mitigate manipulation 
concerns, it does not offer a sufficient explanation of the basis for 
that view or provide supporting information or evidence to support its 
conclusion. Notably, although the Exchange acknowledges that the 
Beneficial Holders Rule is designed to ensure that trading in exchange-
listed securities is not susceptible to manipulation, the Exchange does 
not explain how any of its specific existing surveillances or other 
listing requirements effectively address, in the absence of the 
Beneficial Holders Rule, those manipulation concerns and other 
regulatory risks to fair and orderly markets, investor protection and 
the public interest.\29\ Accordingly, the Commission is unable to 
assess whether the Exchange's assertion has merit.
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    \29\ The Exchange states that its surveillances focus on 
detecting securities trading outside of their normal patterns, 
followed by surveillance analysis and investigations, where 
appropriate, to review the behavior of all relevant parties for all 
relevant trading violations. The Exchange also states that it or the 
Financial Industry Regulatory Authority, on behalf of the Exchange, 
or both, communicate as needed regarding ETP trading with other 
markets and the Intermarket Surveillance Group member entities, and 
may obtain trading information in ETPs from such markets and other 
entities.
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    The Commission identified its concerns with this proposal in the 
OIP,\30\ but the Exchange did not adequately respond or provide 
additional data addressing these concerns. As stated above, 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.'' \31\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
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.\32\ The Commission concludes that, because BZX has not 
demonstrated that its proposal is designed to prevent fraudulent and 
manipulative acts and practices or to protect investors and the public 
interest, the Exchange has not met its burden to demonstrate that its 
proposal is consistent with Section

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6(b)(5) of the Exchange Act.\33\ For this reason, the Commission must 
disapprove the proposal.
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    \30\ See OIP, supra note 6, 88 FR at 80784-5; see also Prior 
Disapproval Order, supra note 9.
    \31\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \32\ See id.
    \33\ In disapproving this proposed rule change, the Commission 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). Although 
the Exchange states that the regulatory and administrative burdens 
of the Beneficial Holders Rule makes it more difficult for smaller 
issuers to compete because they have limited resources to overcome 
legal, marketing, or other obstacles associated with this 
requirement (see Notice, 88 FR at 60517), as discussed above, BZX 
has failed to establish that its Beneficial Holders Rule is 
unnecessary or that smaller issuers of ETF Shares actually have been 
negatively impacted by it.
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IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange, and, in particular, with Section 6(b)(5) of the 
Exchange Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-CboeBZX-2023-062 is 
disapproved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-09328 Filed 4-30-24; 8:45 am]
BILLING CODE 8011-01-P