Document ID: SEC-2019-0849-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2019-06-14T04:00Z

[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:

------------------------------------------------------------------------
         Product type              Nasdaq rule            Arca rule
------------------------------------------------------------------------
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.
---------------------------------------------------------------------------

    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 rule-comments@sec.gov. 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