Document ID: SEC-2020-1060-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2020-07-07T04:00Z

[Federal Register Volume 85, Number 130 (Tuesday, July 7, 2020)]
[Notices]
[Pages 40720-40722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14494]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89197; File No. SR-NYSEArca-2020-56]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of 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

June 30, 2020.
    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 June 18, 2020, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') a proposed rule change described in Items I and II 
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\ 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 NYSE Arca Rules 5.2-E(j)(3) 
(Investment Company Units), 5.2-E(j)(8) (Exchange-Traded Fund Shares), 
5.5-E(g)(2), 8.600-E (Managed Fund Shares) and 8.900-E (Managed 
Portfolio 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, and Managed Portfolio Shares, respectively, on the 
Exchange that the applicable fund has at least 50 beneficial holders, 
and (2) require that a series of Investment Company Units, Exchange-
Traded Fund Shares, Managed Fund Shares, and Managed Portfolio Shares, 
respectively, have at least one creation unit outstanding on an initial 
and continued listing basis. 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

[[Page 40721]]

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, 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
    The Exchange proposes to amend NYSE Arca Rules 5.2-E(j)(3) 
(Investment Company Units), 5.5 E(g)(2), 5.2-E(j)(8) (Exchange-Traded 
Fund Shares),\4\ 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) require that a series of Fund Shares have 
at least one creation unit outstanding on an initial and continued 
listing basis.\5\
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    \4\ A series of Exchange-Traded Fund Shares listed pursuant to 
NYSE Arca Rule 5.2-E (j)(8) is required to be eligible to operate in 
reliance on Rule 6c-11 under the Investment Company Act of 1940, as 
amended (``1940 Act''). See NYSE Arca Rule 5.2-E (j)(8)(e)(1).
    \5\ The term creation unit would have the same meaning as 
defined in Rule 6c-11(a)(1) (i.e., a specified number of exchange-
traded fund shares that the exchange-traded fund will issue to (or 
redeem from) an authorized participant in exchange for the deposit 
(or delivery) of a basket and a cash balancing amount if any).
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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. Exchange-Traded Fund Shares are 
currently subject to the conditions of Rule 6c-11 under 1940 Act \6\ 
and Investment Company Units and Managed Fund Shares will be required 
to operate in compliance with Rule 6c-11 by December 23, 2020.\7\ The 
Exchange believes that the requirements of Rule 6c-11 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 
shareholder requirement was intended to address. The Exchange 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.
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    \6\ See Release No. 33-10695; IC-33646; File No. S7-15-18 
(Exchange-Traded Funds) (September 25, 2019), 84 FR 57162 (October 
24, 2019) (``ETF Adopting Release'').
    \7\ As of December 23, 2020, the Commission is rescinding those 
portions of prior Commission ETF exemptive orders that grant relief 
related to the formation and operation of an ETF. See ETF Adopting 
Release, note 39 and accompanying text.
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    For example, Rule 6c-11(c)(1)(vi), which requires additional 
disclosure if the premium or discount is in excess of 2% for more than 
seven consecutive days, as well as the related website disclosure and 
discussion requirements,\8\ provides additional transparency to 
investors in the event that the trading value and the underlying 
portfolio deviate for an extended period of time, which could indicate 
an inefficient arbitrage mechanism.\9\
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    \8\ Rule 6c-11(c)(1)(vi) provides that ``[i]f the exchange-
traded fund's premium or discount is greater than 2% for more than 
seven consecutive trading days, a statement that the exchange-traded 
fund's premium or discount, as applicable, was greater than 2% and a 
discussion of the factors that are reasonably believed to have 
materially contributed to the premium or discount, which must be 
maintained on the website for at least one year thereafter.''
    \9\ The Commission discussed the importance of an effective and 
efficient arbitrage mechanism in the ETF Adopting Release at 84 FR 
57165 and 57209-57211 (``Secondary Market Trading, Arbitrage and ETF 
Liquidity)''.
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    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 Commission, in approving exchange 
rules accommodating listing and trading of Managed Portfolio Shares, 
stated that the Verified Intraday Indicative Value (``VIIV'') and other 
information required to be disseminated in connection with such trading 
ensures transparency of key values and information for such 
securities.\10\ The Exchange believes that such information is 
sufficient to support an effective arbitrage process, independent of 
any minimum shareholder requirement.
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    \10\ See Securities Exchange Act Release No. 87759 (December 16, 
2019) 84 FR 70223 (December 20, 2019) (SR-CboeBZX-2019-047) (Notice 
of Filing of Amendment Nos. 4 and 5, and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 4 
and 5, to Adopt BZX Rule 14.11(k) to Permit the Listing and Trading 
of Managed Portfolio Shares). In that order, the Commission stated: 
``Although the portfolio holdings of the Managed Portfolio Shares 
are not publicly disclosed on a daily basis, the Commission believes 
that the proposed continued listing standards and trading rules 
under proposed BZX Rule 14.11(k) are adequate to ensure transparency 
of key values and information regarding the securities. The 
Commission notes that, for continued listing of each series of 
Managed Portfolio Shares, the VIIV will be widely disseminated by 
the Reporting Authority and/or one or more major market data vendors 
in one second intervals during Regular Trading Hours, and will be 
disseminated to all market participants at the same time. Further, 
transactions in Managed Portfolio Shares would be permitted only 
during Regular Trading Hours, when one second VIIVs would be 
available. In addition, like all other registered management 
investment companies, each series of Managed Portfolio Shares would 
be required to publicly disclose its portfolio holdings information 
on a quarterly basis, within at least 60 days following the end of 
every fiscal quarter.'' [footnotes omitted]. See also, Securities 
Exchange Act Release No. 88648 (April 15, 2020) 85 FR 22200 (April 
21, 2020) (SR-NYSEArca-2020-32) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change to Adopt NYSE Arca Rule 8.900-
E).
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    The Exchange notes that, as of June 9, 2020, the median creation 
unit size for a series of Fund Shares listed on the Exchange is 50,000 
shares and the mean creation unit size is approximately 58,012 shares. 
As of June 9, 2020, of the approximately 1,368 series of Fund Shares 
listed on the Exchange, the median number of creation units outstanding 
is approximately 71, approximately 214 series have fewer than 10 
creation units outstanding, and approximately 13 series have one 
creation unit outstanding.\11\
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    \11\ NYSE Arca internal data as of June 9, 2020.
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    The arbitrage mechanism relies on the fact that Fund Shares can be 
created and redeemed and that Fund Shares are able to flow into the 
market when the price of a series of Fund Shares is lower than the net 
asset value per share of the portfolio. The resulting buying and 
selling of Fund Shares, as well as the underlying portfolio components, 
generally causes the market price and the net asset value per share to 
align. The functioning of the arbitrage mechanism helps to ensure that 
the trading price in the secondary market is at fair value.
    The existence of the creation and redemption process, as well as 
the proposed requirement that at least one creation unit is always 
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 shareholder requirement 
to support a fair and orderly market in Fund Shares. In addition, the 
Exchange's surveillance procedures for Fund Shares and its ability to 
halt trading in Fund Shares in specified

[[Page 40722]]

circumstances provide for additional investor protections by further 
mitigating any abnormal trading that would affect the Fund Shares' 
prices.\12\
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    \12\ See, e.g., NYSE Arca Rule 7.18-E(d)(2); NYSE Arca Rule 
8.900-E(d)(2).
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \13\ in general and Section 6(b)(5) of the Act \14\ in 
particular in that it is 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.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(5).
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    Exchange-Traded Fund Shares are currently subject to the conditions 
of Rule 6c-11 under 1940 Act \15\ and Investment Company Units and 
Managed Fund Shares will be required to operate in compliance with Rule 
6c-11 by December 23, 2020.\16\ The Exchange believes that the 
requirements of Rule 6c-11 and in particular the website disclosure 
requirements of Rule 6c-11(c), together with the existing creation and 
redemption process and proposed requirement that at least one creation 
unit is always outstanding, would serve to mitigate the risks of 
manipulation and the lack of liquidity that the shareholder requirement 
was intended to address. More specifically, the Exchange believes that 
requiring at least one creation unit to be outstanding at all times, 
together with the enhanced disclosure requirements of Rule 6c-11, would 
facilitate an effective arbitrage mechanism that, for Investment 
Company Units, Managed Fund Shares and Exchange-Traded Fund Shares, 
would 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.
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    \15\ See note 6, supra.
    \16\ See note 7, supra.
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    With respect to Managed Portfolio Shares, the Commission, in 
approving exchange rules accommodating listing and trading of Managed 
Portfolio Shares, stated that the VIIV and other information required 
to be disseminated in connection with such trading ensures transparency 
of key values and information for such securities.\17\ The Exchange 
believes that such information is sufficient to support an effective 
arbitrage process, independent of any minimum shareholder requirement.
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    \17\ See note 10, supra.
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    Reliance on the conditions of Rule 6c-11 (for Investment Company 
Units, Exchange-Traded Fund Shares and Managed Fund Shares) or the VIIV 
and other requirements applicable to Managed Portfolio Shares, together 
with the existing creation and redemption process, as well as the 
presence of at least one creation unit, would serve to work together to 
mitigate the risks of manipulation and the lack of liquidity that the 
shareholder requirement was intended to address. By further aligning 
the listing requirements with the operational relationship between 
investors, market participants and ETF issuers, the proposal 
facilitates greater transparency for investors and issuers resulting in 
a more efficient market and increased investor protections.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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 that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange believes that 
the proposed rule change will facilitate growth in development of new 
issues of Fund Shares, to the benefit of investors and the marketplace.

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 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 rule-comments@sec.gov. 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 
on or before July 28, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14494 Filed 7-6-20; 8:45 am]
BILLING CODE 8011-01-P