Document ID: SEC-2021-1183-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2021-09-02T04:00Z

[Federal Register Volume 86, Number 168 (Thursday, September 2, 2021)]
[Notices]
[Pages 49357-49360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-18943]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92790; File No. SR-NASDAQ-2021-065]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Nasdaq Rule 5750 
(Proxy Portfolio Shares) To Provide for the Use of Custom Baskets 
Consistent With the Exemptive Relief Issued Pursuant to the Investment 
Company Act of 1940 Applicable to a Series of Proxy Portfolio Shares

August 27, 2021.
    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 August 25, 2021, 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 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Nasdaq Rule 5750 (Proxy Portfolio 
Shares) to provide for the use of ``Custom Baskets'' consistent with 
the exemptive relief issued pursuant to the Investment Company Act of 
1940 applicable to a series of Proxy Portfolio Shares. The text of the 
proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, 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

[[Page 49358]]

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 amend Nasdaq Rule 5750 (Proxy Portfolio 
Shares) \3\ to provide for the use of ``Custom Baskets'' consistent 
with the exemptive relief issued pursuant to the Investment Company Act 
of 1940 \4\ applicable to a series of Proxy Portfolio Shares.
---------------------------------------------------------------------------

    \3\ Nasdaq Rule 5750 defines the term ``Proxy Portfolio Share'' 
as a security that: (A) Represents an interest in an investment 
company registered under the Investment Company Act of 1940 
(``Investment Company'') organized as an open- end management 
investment company, that invests in a portfolio of securities 
selected by the Investment Company's investment adviser consistent 
with the Investment Company's investment objectives and policies; 
(B) is issued in a specified aggregate minimum number in return for 
a deposit of a specified Proxy Basket and/or a cash amount with a 
value equal to the next determined net asset value; (C) when 
aggregated in the same specified minimum number, may be redeemed at 
a holder's request, which holder will be paid specified Proxy Basket 
and/or a cash amount with a value equal to the next determined net 
asset value; and (D) the portfolio holdings for which are disclosed 
within at least 60 days following the end of every fiscal quarter.
    \4\ 15 U.S.C. 80a et seq.
---------------------------------------------------------------------------

    To effectuate this change, the Exchange proposes the following 
amendments to Nasdaq Rule 5750:
    First, the proposed rule change adopts new subparagraph (c)(6) 
under Nasdaq Rule 5750 (Definitions), which defines ``Custom Basket'', 
for the purposes of Nasdaq Rule 5750, to mean a portfolio of securities 
that is different from the Proxy Basket and is otherwise consistent 
with the exemptive relief issued pursuant to the Investment Company Act 
of 1940 applicable to a series of Proxy Portfolio Shares. The proposed 
rule change makes conforming amendments to the definition of Proxy 
Portfolio Shares in Nasdaq Rule 5750(c)(1) and Reporting Authority in 
Nasdaq Rule 5750(c)(3). The proposed rule change amends the definition 
of ``Proxy Portfolio Share'' in Nasdaq Rule 5750(c)(1) to provide for 
creations of shares in return for a deposit by the purchaser of, and 
redemptions of shares at a holder's request in return for, a Custom 
Basket rather than a Proxy Basket to the extent permitted by a fund's 
exemptive relief.
    In addition, the proposed rule change amends the definition of 
``Reporting Authority'' in respect of a particular series of Proxy 
Portfolio Shares in Nasdaq Rule 5750(c)(3) to provide for Custom 
Baskets to the extent permitted by a fund's exemptive relief. 
Currently, ``Reporting Authority'' in respect of a particular series of 
Proxy Portfolio Shares means the Exchange, an institution, or a 
reporting service designated by the Exchange or by the exchange that 
lists a particular series of Proxy Portfolio Shares (if the Exchange is 
trading such series pursuant to unlisted trading privileges) as the 
official source for calculating and reporting information relating to 
such series, including, but not limited to, the Proxy Basket; the Fund 
Portfolio; the amount of any cash distribution to holders of Proxy 
Portfolio Shares, net asset value, or other information relating to the 
issuance, redemption or trading of Proxy Portfolio Shares. Nasdaq Rule 
5750(c)(3) further provides that a series of Proxy Portfolio Shares may 
have more than one Reporting Authority, each having different 
functions. The proposed rule change adds ``Custom Basket'' to the non-
exclusive list of information relating to Proxy Portfolio Shares that a 
Reporting Authority calculates and reports, i.e., including, but not 
limited to, the Proxy Basket; the Fund Portfolio; the amount of any 
cash distribution to holders of Proxy Portfolio Shares, net asset 
value, or other information relating to the issuance, redemption or 
trading of Proxy Portfolio Shares.
    Second, the proposed rule change amends Nasdaq Rule 5750(d) 
(Initial and Continued Listing), which currently provides criteria that 
Proxy Portfolio Shares must satisfy for initial and continued listing 
on the Exchange, to incorporate specific initial and continued listing 
criteria for Custom Baskets. Specifically, Nasdaq Rule 5750(d)(1)(B) 
currently provides that the Exchange will obtain a representation from 
the issuer of each series of Proxy Portfolio Shares that the net asset 
value per share for the series will be calculated daily and that each 
of the following will be made available to all market participants at 
the same time when disclosed: The net asset value, the Proxy Basket, 
and the Fund Portfolio. The proposed rule change adopts an additional 
requirement in Nasdaq Rule 5750(d)(1)(B) providing that the Exchange 
will also obtain a representation from the issuer of each series of 
Proxy Portfolio Shares that the issuer and any person acting on behalf 
of the series of Proxy Portfolio Shares will comply with Regulation 
Fair Disclosure under the Act, including with respect to any Custom 
Basket.\5\
---------------------------------------------------------------------------

    \5\ 17 CFR 243.100-243.103. Regulation Fair Disclosure provides 
that whenever an issuer, or any person acting on its behalf, 
discloses material nonpublic information regarding that issuer or 
its securities to certain individuals or entities--generally, 
securities market professionals, such as stock analysts, or holders 
of the issuer's securities who may well trade on the basis of the 
information--the issuer must make public disclosure of that 
information.
---------------------------------------------------------------------------

    Third, the proposed Rule change amends Nasdaq Rule 5750(d)(2)(A), 
which currently provides that, with respect to each Proxy Basket, that 
it will be publicly disseminated at least once daily and will be made 
available to all market participants at the same time. Nasdaq Rule 
5750(d)(2)(A) will be amended to provide that, with respect to each 
Custom Basket utilized by a series of Proxy Portfolio Shares, each 
business day, before the opening of trading in the regular market 
session, the investment company shall make publicly available on its 
website the composition of any Custom Basket transacted on the previous 
business day, except a Custom Basket that differs from the applicable 
Proxy Basket only with respect to cash.
    The proposed rule change also makes conforming amendments to Nasdaq 
Rule 5750(b)(5) and (6). In particular, Nasdaq Rule 5750(b)(5) 
currently provides that, if the investment adviser to the Investment 
Company issuing Proxy Portfolio Shares is registered as a broker-dealer 
or is affiliated with a broker-dealer, such investment adviser will 
erect and maintain a ``fire wall'' between the investment adviser and 
personnel of the broker-dealer or broker-dealer affiliate, as 
applicable, with respect to access to information concerning the 
composition of and/or changes to the Fund Portfolio and/or the Proxy 
Basket. Any person related to the investment adviser or Investment 
Company who makes decisions pertaining to the Investment Company's Fund 
Portfolio and/or the Proxy Basket or has access to nonpublic 
information regarding the Fund Portfolio and/or the Proxy Basket or 
changes thereto must be subject to procedures designed to prevent the 
use and dissemination of material nonpublic information regarding the 
Fund Portfolio and/or the Proxy Basket or changes thereto. The proposed 
rule change amends Nasdaq Rule 5750(b)(5) to provide for Custom Baskets 
to the extent permitted by a fund's exemptive relief. As proposed, 
Nasdaq Rule 5750(b)(5) provides that if the investment adviser to the 
Investment Company issuing Proxy Portfolio Shares is registered as a 
broker-dealer or is affiliated with a broker-dealer, such investment 
adviser will erect and maintain a ``fire wall'' between the investment 
adviser and personnel of the broker-dealer or broker-

[[Page 49359]]

dealer affiliate, as applicable, with respect to access to information 
concerning the composition of and/or changes to the Fund Portfolio, the 
Proxy Basket, and/or the Custom Basket, as applicable. In addition, 
proposed Nasdaq Rule 5750(b)(5) provides that any person related to the 
investment adviser or Investment Company who makes decisions pertaining 
to the Investment Company's Fund Portfolio, the Proxy Basket, and/or 
the Custom Basket or has access to nonpublic information regarding the 
Fund Portfolio, the Proxy Basket, and/or the Custom Basket, as 
applicable, or changes thereto must be subject to procedures designed 
to prevent the use and dissemination of material nonpublic information 
regarding the Fund Portfolio, the Proxy Basket, and/or the Custom 
Basket, as applicable, or changes thereto.
    Nasdaq Rule 5750(b)(6) currently provides that any person or 
entity, including a custodian, Reporting Authority, distributor, or 
administrator, who has access to nonpublic information regarding the 
Fund Portfolio or the Proxy Basket or changes thereto, must be subject 
to procedures designed to prevent the use and dissemination of material 
nonpublic information regarding the applicable Fund Portfolio or the 
Proxy Basket or changes thereto. Moreover, if any such person or entity 
is registered as a broker-dealer or affiliated with a broker-dealer, 
such person or entity will erect and maintain a ``fire wall'' between 
the person or entity and the broker-dealer with respect to access to 
information concerning the composition and/or changes to such Fund 
Portfolio or Proxy Basket. The proposed rule change similarly amends 
Nasdaq Rule 5750(b)(6) to provide for Custom Baskets to the extent 
permitted by a fund's exemptive relief. As proposed, Nasdaq Rule 
5750(b)(6)provides that any person or entity, including a custodian, 
Reporting Authority, distributor, or administrator, who has access to 
nonpublic information regarding the Fund Portfolio, the Proxy Basket, 
or the Custom Basket, as applicable, or changes thereto, must be 
subject to procedures designed to prevent the use and dissemination of 
material nonpublic information regarding the applicable Fund Portfolio, 
the Proxy Basket, or the Custom Basket, as applicable, or changes 
thereto. Moreover, if any such person or entity is registered as a 
broker-dealer or affiliated with a broker-dealer, such person or entity 
will erect and maintain a ``fire wall'' between the person or entity 
and the broker-dealer with respect to access to information concerning 
the composition and/or changes to such Fund Portfolio, Proxy Basket, or 
Custom Basket, as applicable.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \6\ in general and Section 6(b)(5) of the Act \7\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in 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. Additionally, the Exchange believes the proposed rule 
change is consistent with the Section 6(b)(5) \8\ requirement that the 
rules of an exchange not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ Id.
---------------------------------------------------------------------------

    The Exchange believes that proposed rule change to provide for the 
use of Custom Baskets consistent with the applicable exemptive relief 
applicable to a series of Proxy Portfolio Shares will perfect the 
mechanism of a free and open market and, in general, to protect 
investors and the public interest in that it will permit use of Custom 
Baskets, consistent with the applicable exemptive relief, in a manner 
that will benefit investors by increasing efficiencies in the creation 
and redemption process. More specifically, Custom Baskets provide an 
issuer with flexibility in portfolio construction that may assist in 
reducing taxable capital gains distributions for investors and may 
generally improve tax efficiencies. Further, the use of Custom Baskets, 
to the extent permitted by a fund's exemptive relief, may also result 
in narrower bid/ask spreads and smaller premiums and discounts to the 
net asset value for Proxy Portfolio Shares to the extent that the 
Investment Company utilizes Custom Baskets with fewer securities which 
may, in turn, allow Authorized Participants to more efficiently hedge 
and participate generally in the Proxy Portfolio Shares. In addition to 
this, the flexibility provided in the creation of Custom Baskets may 
serve to increase competition between issuers. The Exchange believes 
the proposed rule change will enhance competition among market 
participants overall, to the benefit of investors and the marketplace.
    The Exchange also believes that amending Nasdaq Rule 5750 to 
incorporate specific initial listing criteria required to be met by 
Proxy Portfolio Shares that utilize Custom Baskets is designed to 
prevent fraudulent and manipulative acts and practices. The Exchange 
believes that the daily dissemination of the composition of any Custom 
Basket transacted on the previous day, except a Custom Basket that 
differs from the applicable Proxy Basket only with respect to cash, 
together with the right of Authorized Participants to create and redeem 
each day at the net asset value, will enable market participants to 
value and trade shares in a manner that will not lead to significant 
deviations between the bid/ask price and net asset value of shares of a 
series of Proxy Portfolio Shares.
    Further, including Custom Baskets in the requirements of Nasdaq 
Rule 5750(b)(5) and (6) would act as a safeguard against any misuse and 
improper dissemination of nonpublic information related to a fund's 
Custom Basket or changes thereto. The requirement that any person or 
entity implement procedures reasonably designed to prevent the use and 
dissemination of material non-public information regarding a Custom 
Basket will act to prevent any individual or entity from sharing such 
information externally and the internal ``fire wall'' requirements 
applicable where an entity is a registered broker-dealer or affiliated 
with a broker-dealer will act to make sure that no entity will be able 
to misuse the data for their own purposes. As such, the Exchange 
believes that the proposed rule change to Nasdaq Rule 5750 is designed 
to prevent fraudulent and manipulative acts and practices.
    The Exchange also believes that the proposed initial and continued 
listing standards are designed to promote disclosure and transparency 
with respect to the use of Custom Baskets consistent with the 
applicable exemptive relief. Specifically, the Exchange believes that 
requiring as an initial listing condition that an issuer and any person 
acting on behalf of the series of Proxy Portfolio Shares comply with 
Regulation Fair Disclosure under the Act, including with respect to any 
Custom Basket, would further the full and fair disclosure objectives of 
Regulation Fair Disclosure to the benefit of the investing public and 
all market participants. Additionally, with respect to each Custom 
Basket utilized by a series of Proxy Portfolio Shares, the Exchange 
believes that requiring, as a

[[Page 49360]]

continued listing condition, that each business day, before the opening 
of trading in the regular market session, an investment company make 
publicly available on its website the composition of any Custom Basket 
transacted on the previous business day, except a Custom Basket that 
differs from the applicable Proxy Basket only with respect to cash, 
also furthers the goals of transparency and full and fair disclosure, 
to the benefit of investors and the public interest.

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 the 
proposed rule change, by permitting the use of Custom Baskets, is 
consistent with a fund's exemptive relief, would introduce additional 
competition among various ETF products to the benefit of investors.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(A) By order approve or disapprove such 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-NASDAQ-2021-065 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-2021-065. 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-2021-065 and should be submitted 
on or before September 23, 2021.
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-18943 Filed 9-1-21; 8:45 am]
BILLING CODE 8011-01-P