Document ID: SEC-2020-0398-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2020-03-19T04:00Z

[Federal Register Volume 85, Number 54 (Thursday, March 19, 2020)]
[Notices]
[Pages 15834-15836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-05677]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88378; File No. SR-NYSEArca-2019-77]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To List and Trade Shares of the AdvisorShares Pure US 
Cannabis ETF Under NYSE Arca Rule 8.600-E

March 13, 2020.
    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. 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\ The Commission has 
received no comment letters on the proposal. The Commission is 
publishing this order to institute proceedings under Section 
19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change.
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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 (``Notice'').
    \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).
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I. Exchange's Description of the Proposal \7\
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    \7\ The Commission notes that additional information regarding, 
among other things, the Shares, Fund, investment objective, 
permitted investments, investment strategies and methodology, 
investment restrictions, investment adviser, creation and redemption 
procedures, availability of information, trading rules and halts, 
and surveillance procedures, can be found in the Notice (see supra 
note Error! Bookmark not defined.) and the Registration Statement 
(see infra note 9), as applicable.
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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 \8\ on the Exchange.
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    \8\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (``1940 Act'') organized as an open-end 
investment company or similar entity that invests in a portfolio of 
securities selected by its investment adviser consistent with its 
investment objectives and policies.
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    AdvisorShares Investments, LLC (``Adviser'') is the investment 
adviser for the Fund.\9\ 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.\10\ 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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    \9\ 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.
    \10\ The Exchange represents that 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 Exchange represents that 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,\11\ 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 and in derivatives 
that have economic characteristics similar to such securities.\12\
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    \11\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
    \12\ 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, the Fund will not invest directly in or 
hold ownership in any companies that engage in cannabis-related 
business unless permitted by national and local laws of the relevant 
jurisdiction, including U.S. federal and state laws. The Fund has 
represented that this restriction does not apply to the Fund's 
investment in derivatives instruments. 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. The Fund will 
concentrate at least 25% of its investments in the pharmaceuticals, 
biotechnology and life sciences industry group within the health care 
sector.
    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

[[Page 15835]]

(``ETFs'') \13\ and in U.S. exchange-listed closed-end funds.
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    \13\ 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 over-the-counter (``OTC'') total return swaps on 
U.S. and foreign exchange-listed equity securities.
    The Fund may hold cash and cash equivalents.\14\
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    \14\ 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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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 this proposed rule change.

D. Application of Generic Listing Requirements

    The Exchange represents that it is submitting this 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 Exchange 
represents that the Fund's portfolio would meet all such requirements 
except for those set forth in Commentary .01(e),\15\ as described 
below.
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    \15\ 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.
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    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). Alternatively, 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.\16\ The only OTC derivatives that the Fund 
may invest in are OTC total return swaps on U.S. and foreign exchange-
listed equity securities. The Exchange represents that, 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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    \16\ 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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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2019-77 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \17\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \17\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\18\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and ``to protect investors and the public 
interest.'' \19\
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    \18\ Id.
    \19\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\20\ in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks commenters' views regarding whether the Exchange has adequately 
described and provided clear information about the Fund's proposed 
portfolio, including the Fund's proposed investments in securities of 
companies that derive a significant portion of their revenue from the 
marijuana and hemp business, in derivatives providing exposure to such 
securities, and 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 DEA specifically for the 
purpose of handling marijuana for lawful research and development of 
cannabis or cannabinoid-related products, for the Commission to make a 
determination under Section 6(b)(5) of the Act.
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    \20\ See Notice, supra note 3.
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\21\
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    \21\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by April 9, 2020. Any person who wishes to file a rebuttal 
to

[[Page 15836]]

any other person's submission must file that rebuttal by April 23, 
2020. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, in addition to 
any other comments they may wish to submit about the proposed rule 
change.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2019-77 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2019-77. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2019-77 and should be submitted 
by April 9, 2020. Rebuttal comments should be submitted by April 23, 
2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-05677 Filed 3-18-20; 8:45 am]
 BILLING CODE 8011-01-P