Document ID: SEC-2020-1365-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2020-08-25T04:00Z

[Federal Register Volume 85, Number 165 (Tuesday, August 25, 2020)]
[Notices]
[Pages 52394-52396]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18563]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89608; File No. SR-NYSEArca-2019-77]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To 
List and Trade Shares of the AdvisorShares Pure US Cannabis ETF Under 
NYSE Arca Rule 8.600-E

August 19, 2020.

I. Introduction

    On December 13, 2019, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
AdvisorShares Pure US Cannabis ETF (``Fund'') under NYSE Arca Rule 
8.600-E (``Managed Fund Shares''). The proposed rule change was 
published for comment in the Federal Register on December 26, 2019.\3\ 
On January 28, 2020, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the proposed 
rule change.\5\ On March 13, 2020, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine 
whether to approve or disapprove the proposed rule change.\7\ On June 
12, 2020, pursuant to Section 19(b)(2) of the Act,\8\ the Commission 
designated a longer period within which to issue an order approving or 
disapproving the proposed rule change.\9\ On July 7, 2020, the Exchange 
filed Amendment No. 1 to the proposed rule change.\10\ The Commission 
has received no comment letters on the proposal. This order approves 
the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 87791 (December 18, 
2019), 84 FR 71057.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 88066, 85 FR 6009 
(February 3, 2020). The Commission designated March 25, 2020, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to approve or disapprove the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 88378, 85 FR 15834 
(March 19, 2020).
    \8\ 15 U.S.C. 78s(b)(2).
    \9\ See Securities Exchange Act Release No. 89057, 85 FR 36910 
(June 18, 2020). The Commission designated August 22, 2020, as the 
date by which the Commission shall either approve or disapprove the 
proposed rule change.
    \10\ In Amendment No. 1, the Exchange (i) represented that the 
Fund has obtained an opinion of counsel that provides that (a) the 
Fund and its shareholders will not violate the Controlled Substances 
Act, 21 U.S.C. 801, et seq., (``Controlled Substances Act'') or the 
Money Laundering Control Act, 18 U.S.C. 1956, et seq., for the 
Fund's purchase of securities issued by Cannabis Companies (as 
defined herein) which participate in the cannabis industry in full 
compliance with state law and (b) the Fund's execution of a cash-
settled total return swap, under certain circumstances, would not 
subject the Fund and its shareholders to regulatory liability should 
a court hold that the total return swap violates the Act or the 
Controlled Substances Act; and (ii) made other conforming technical 
changes. Because Amendment No. 1 to the proposed rule change does 
not materially alter the substance of the proposed rule change and 
makes conforming and technical changes, Amendment No. 1 is not 
subject to notice and comment. Amendment No. 1 is available on the 
Commission's website at: https://www.sec.gov/comments/sr-nysearca-2019-77/srnysearca201977-7394645-218996.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1 11
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    \11\ Additional information regarding the Shares and the Fund 
can be found in Amendment No. 1, supra note 10, and the Registration 
Statement, infra note 13.
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    The Exchange proposes to list and trade Shares of the Fund under 
Commentary .01 to NYSE Arca Rule 8.600-E, which governs the listing and 
trading of Managed Fund Shares on the Exchange. AdvisorShares 
Investments, LLC (``Adviser'') is the investment

[[Page 52395]]

adviser for the Fund.\12\ AdvisorShares Trust (``Trust'') and the 
Adviser manage the Fund's investments, subject to the oversight and 
supervision by the Board of Trustees of the Trust.\13\ Foreside Fund 
Services, LLC, a registered broker-dealer, will act as the distributor 
for the Fund's Shares. The Bank of New York Mellon will serve as the 
administrator, custodian, and transfer agent for the Fund.
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    \12\ The Exchange represents that the Adviser is not registered 
as a broker-dealer, and the Adviser is not affiliated with any 
broker-dealers. In the event (a) the Adviser becomes registered as a 
broker-dealer or newly affiliated with a broker-dealer, or (b) any 
new adviser is a registered broker-dealer or becomes affiliated with 
a broker-dealer, it will implement and maintain a ``fire wall'' with 
respect to its relevant personnel or broker-dealer affiliate 
regarding access to information concerning the composition of, and/
or changes to, the portfolio, and will be subject to procedures, 
each designed to prevent the use and dissemination of material non-
public information regarding the portfolio.
    \13\ The Trust is registered under the 1940 Act. On August 19, 
2019, the Trust filed with the Commission Post-Effective Amendment 
No. 145 to the Trust's registration statement on Form N-1A under the 
Securities Act of 1933 (15 U.S.C. 77a) and under the 1940 Act 
relating to the Fund (File Nos. 333-157876 and 811-22110) 
(``Registration Statement''). In addition, the Commission has issued 
an order granting certain exemptive relief to the Trust under 
the1940 Act. See Investment Company Act Release No. 29291 (May 28, 
2010) (File No. 812-13677).
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A. Principal Investments of the Fund

    According to the Exchange, the investment objective of the Fund is 
to seek long-term capital appreciation. The Fund will seek to achieve 
its investment objective by investing, under normal market 
conditions,\14\ at least 80% of its net assets in securities of 
companies that derive at least 50% of their net revenue from the 
marijuana and hemp business in the United States (``Cannabis 
Companies'') and in derivatives that have economic characteristics 
similar to such securities.\15\
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    \14\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
    \15\ The Fund's investments in derivatives will include 
investments in both listed derivatives and over-the-counter 
(``OTC'') derivatives, as those terms are defined in Commentary 
.01(d) and (e) to NYSE Arca Rule 8.600-E.
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    In addition to its investment in securities of companies that 
derive a significant portion of their revenue from the marijuana and 
hemp business, and in derivatives providing exposure to such 
securities, the Fund may invest in securities of companies that, in the 
opinion of the Advisor, may have current or future revenues from 
cannabis-related business or that are registered with the United States 
Drug Enforcement Agency (DEA) specifically for the purpose of handling 
marijuana for lawful research and development of cannabis or 
cannabinoid-related products.
    According to the Exchange, all of the Fund's investments, including 
derivatives instruments, would be made in accordance with all 
applicable laws, including U.S. federal and state laws.\16\ The Fund 
will concentrate at least 25% of its investments in the 
pharmaceuticals, biotechnology and life sciences industry group within 
the health care sector.
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    \16\ The Fund filed an opinion of counsel on July 1, 2020 as an 
exhibit to the Registration Statement. See supra notes 10 and 13.
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    The Fund primarily may invest in U.S. and foreign exchange-listed 
equity securities and in derivative instruments, as further described 
in this section, intended to provide exposure to such securities.
    The Fund may invest in the following types of U.S. and foreign 
exchange-listed equity securities: Common stock; preferred stock; 
warrants; Real Estate Investment Trusts (REITs); and rights. The Fund 
may also invest in U.S. exchange-listed exchange-traded funds 
(``ETFs'') \17\ and in U.S. exchange-listed closed-end funds.
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    \17\ For purposes of this filing, the term ``ETFs'' includes 
Investment Company Units (as described in NYSE Arca Rule 5.2-
E(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca 
Rule 8.100-E); and Managed Fund Shares (as described in NYSE Arca 
Rule 8.600-E). All ETFs will be listed and traded in the U.S. on a 
national securities exchange. While the Fund may invest in inverse 
ETFs, the Fund will not invest in leveraged (e.g., 2X, -2X, 3X or -
3X) ETFs.
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    The Fund may hold cash and cash equivalents.\18\
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    \18\ For purposes of this filing, ``cash equivalents'' are the 
short-term instruments enumerated in Commentary .01(c) to NYSE Arca 
Rule 8.600-E.
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    The Fund may hold OTC total return swaps on U.S. and foreign 
exchange-listed equity securities.

B. Other Investments of the Fund

    In addition to the Fund's principal investments described above, 
the Fund may invest in U.S. exchange-listed equity options and equity 
index options and in Rule 144A securities.

C. Investment Restrictions

    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objective and will not be used to enhance 
leverage (although certain derivatives and other investments may result 
in leverage). That is, the Fund's investments will not be used to seek 
performance that is the multiple or inverse multiple (e.g., 2X or -3X) 
of the Fund's primary broad-based securities benchmark index (as 
defined in Form N-1A).
    The Fund will not invest in securities or other financial 
instruments that have not been described in the proposed rule change.

D. Application of Generic Listing Requirements

    The Exchange is submitting the proposed rule change because the 
portfolio for the Fund will not meet all of the ``generic'' listing 
requirements of Commentary .01 to NYSE Arca Rule 8.600-E applicable to 
the listing of Managed Fund Shares. The Fund's portfolio will meet all 
such requirements except for those set forth in Commentary .01(e).\19\ 
Specifically, the Exchange proposes that the Fund's investments in OTC 
total return swaps on U.S. and foreign exchange-listed equity 
securities may exceed the 20% limit on investments in OTC derivatives 
set forth in in Commentary .01(e). The Exchange proposes that up to 60% 
of the Fund's assets (calculated as the aggregate gross notional value) 
may be invested in OTC total return swaps on U.S. and foreign exchange-
listed equity securities.\20\ The only OTC derivatives that the Fund 
may invest in are OTC total return swaps on U.S. and foreign exchange-
listed equity securities. Price information relating to OTC swaps will 
be available from major market data vendors. Other than Commentary 
.01(e), the Shares of the Fund will conform to the initial and 
continued listing criteria under NYSE Arca Rule 8.600-E and will meet 
all other requirements of NYSE Arca Rule 8.600-E and Commentary .01 
thereto.
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    \19\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that a 
portfolio may hold OTC derivatives, including forwards, options and 
swaps on commodities, currencies and financial instruments (e.g., 
stocks, fixed income, interest rates, and volatility) or a basket or 
index of any of the foregoing; however, on both an initial and 
continuing basis, no more than 20% of the assets in the portfolio 
may be invested in OTC derivatives. For purposes of calculating this 
limitation, a portfolio's investment in OTC derivatives will be 
calculated as the aggregate gross notional value of the OTC 
derivatives.
    \20\ The Exchange represents that the Adviser monitors 
counterparty credit risk exposure (including for OTC derivatives) 
and evaluates counterparty credit quality on a continuous basis.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\21\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with

[[Page 52396]]

Section 6(b)(5) of the Act,\22\ which requires, among other things, 
that the Exchange's rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \21\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
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    As discussed above, the Exchange proposes that the Fund may invest 
up to 60% of its assets (calculated as the aggregate gross notional 
value) in OTC derivatives. The only OTC derivatives that the Fund may 
invest in are OTC total return swaps on U.S. and foreign exchange-
listed equity securities, so the underlying securities are trading on 
transparent and regulated markets. In addition, the Fund will disclose 
on its website information regarding the Disclosed Portfolio required 
under NYSE Arca Rule 8.600-E(c)(2) to the extent applicable and such 
website information will be publicly available at no charge.\23\ Other 
than Commentary .01(e), the Shares of the Fund will conform to the 
initial and continued listing criteria under NYSE Arca Rule 8.600-E and 
will meet all other requirements of NYSE Arca Rule 8.600-E and 
Commentary .01 thereto. All Fund investments, including derivative 
instruments (i.e., OTC total return swaps on U.S. and foreign exchange-
listed equity securities), will be made in accordance with all 
applicable laws, including U.S. federal and state laws.
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    \23\ See Amendment No. 1, supra note 10, at 12.
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    In evaluating these aspects of the proposal, the Commission 
believes that the proposal is reasonably designed to mitigate the 
Shares' susceptibility to manipulation because (i) the investments of 
the Fund will be transparent in that they are required to be disclosed 
daily and specifically will include information regarding the Fund's 
investments in OTC derivatives; (ii) the instruments underlying the 
Fund's OTC derivative investments will be traded on transparent and 
regulated markets, as the only OTC derivatives that the Fund may invest 
in are total return swaps on U.S. and foreign exchange-listed equity 
securities; and (iii) the Fund's investments otherwise are consistent 
with the Exchange's generic listing standards. In addition, the 
Commission believes that the proposal is consistent with the listing of 
other series of Managed Fund Shares that have been approved by the 
Commission.\24\
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    \24\ See, e.g., Securities Exchange Act Release No. 82080 
(November 15, 2017), 82 FR 55449 (November 21, 2017) (NYSEArca-2017-
86) (Order Granting Approval of a Proposed Rule Change, as Modified 
by Amendment Nos. 1 and 2, To List and Trade Shares of the JPMorgan 
Managed Futures ETF Under NYSE Arca Rule 8.600-E); Securities 
Exchange Act Release No. 82492 (January 12, 2018), 83 FR 2850 
(January 19, 2018) (SR-NYSEArca-2017-87) (Order Granting Approval of 
a Proposed Rule Change, as Modified by Amendment No. 6, To List and 
Trade Shares of the JPMorgan Long/Short ETF Under NYSE Arca Rule 
8.600-E).
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    Pursuant to Commentary .01 to NYSE Arca Rule 8.600-E, all 
statements or representations made in the filing regarding (a) the 
description of the portfolio or reference asset, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange listing rules specified in the filing shall constitute 
continued listing requirements for listing the Shares on the Exchange. 
In addition, the issuer must notify the Exchange of any failure by the 
Fund to comply with the continued listing requirements. Pursuant to its 
obligations under Section 19(g)(1) of the Act, the Exchange will 
monitor \25\ for compliance with the continued listing requirements. If 
the Fund is not in compliance with the applicable listing requirements, 
the Exchange will commence delisting procedures under NYSE Arca Rule 
5.5-E(m).
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    \25\ The Commission notes that certain proposals for the listing 
and trading of exchange-traded products include a representation 
that the exchange will ``surveil'' for compliance with the continued 
listing requirements. See, e.g., Securities Exchange Act Release No. 
77499 (April 1, 2016), 81 FR 20428, 20432 (April 7, 2016) (SR-BATS-
2016-04). In the context of this representation, it is the 
Commission's view that ``monitor'' and ``surveil'' both mean ongoing 
oversight of compliance with the continued listing requirements. 
Therefore, the Commission does not view ``monitor'' as a more or 
less stringent obligation than ``surveil'' with respect to the 
continued listing requirements.
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    Accordingly, for the foregoing reasons, the Commission finds that 
the proposed rule change, as modified by Amendment No. 1, is consistent 
with Section 6(b)(5) of the Act \26\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \26\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-NYSEArca-2019-77), as 
modified by Amendment No. 1, be, and it hereby is, approved.
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    \27\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18563 Filed 8-24-20; 8:45 am]
BILLING CODE 8011-01-P