Document ID: SEC-2021-1420-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2021-10-14T04:00Z

[Federal Register Volume 86, Number 196 (Thursday, October 14, 2021)]
[Notices]
[Pages 57227-57229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-22437]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93277; File No. SR-NASDAQ-2021-065]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Granting Approval of a 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

October 8, 2021.

I. Introduction

    On August 25, 2021, The Nasdaq Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a 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 (``1940 Act'') \3\ applicable to a series of Proxy Portfolio 
Shares. The proposed rule change was published for comment in the 
Federal Register on September 2, 2021.\4\ The Commission has received 
no comments on the proposed rule change. The Commission is approving 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 80a.
    \4\ See Securities Exchange Act Release No. 92790 (August 27, 
2021), 86 FR 49357.

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[[Page 57228]]

II. Description

    The Exchange proposes to amend Nasdaq Rule 5750, which permits the 
listing and trading of series of Proxy Portfolio Shares. Nasdaq Rule 
5750 currently requires that Proxy Portfolio Shares be issued and 
redeemed in a specified aggregate minimum number in return for the 
Proxy Basket \5\ and/or cash.\6\ The Exchange proposes to amend the 
definition of ``Proxy Portfolio Share'' in Nasdaq Rule 5750(c)(1) to 
permit creations and redemptions of shares in return for a Custom 
Basket in addition to the Proxy Basket, to the extent permitted by a 
fund's exemptive relief.\7\ Further, the Exchange proposes to define 
the term ``Custom Basket'' as a portfolio of securities that is 
different from the Proxy Basket and is otherwise consistent with the 
exemptive relief issued pursuant to the 1940 Act applicable to a series 
of Proxy Portfolio Shares.\8\ The Exchange also proposes to amend the 
definition of ``Reporting Authority'' in Nasdaq Rule 5750(c)(3) to 
include Custom Baskets among the types of information for which the 
Reporting Authority designated for a particular series of Proxy 
Portfolio Shares will be the official source for calculating and 
reporting such information.\9\
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    \5\ The term ``Proxy Basket'' means the identities and 
quantities of the securities and other assets included in a basket 
that is designed to closely track the daily performance of the Fund 
Portfolio, as provided in the exemptive relief under the 1940 Act 
applicable to a series of Proxy Portfolio Shares. See Nasdaq Rule 
5750(c)(5). The term ``Fund Portfolio'' means the identities and 
quantities of the securities and other assets held by the investment 
company registered under the 1940 Act (``Investment Company'') that 
will form the basis for the Investment Company's calculation of net 
asset value (``NAV'') at the end of the business day. See Nasdaq 
Rule 5750(c)(2).
    \6\ See Nasdaq Rule 5750(c)(1) (defining the term ``Proxy 
Portfolio Share'').
    \7\ See proposed Nasdaq Rule 5750(c)(1) (defining ``Proxy 
Portfolio Share'' as a security that: (A) Represents an interest in 
an 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 or Custom Basket, as applicable, 
and/or a cash amount with a value equal to the next determined NAV; 
(C) when aggregated in the same specified minimum number, may be 
redeemed at a holder's request, which holder will be paid a 
specified Proxy Basket or Custom Basket, as applicable, and/or a 
cash amount with a value equal to the next determined NAV; and (D) 
the portfolio holdings for which are disclosed within at least 60 
days following the end of every fiscal quarter).
    \8\ See proposed Nasdaq Rule 5750(c)(6).
    \9\ See proposed Nasdaq Rule 5750(c)(3) (defining ``Reporting 
Authority'' in respect of a particular series of Proxy Portfolio 
Shares as 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 Custom Basket; the amount of any cash 
distribution to holders of Proxy Portfolio Shares, NAV, or other 
information relating to the issuance, redemption or trading of Proxy 
Portfolio Shares).
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    The Exchange proposes to amend Nasdaq Rule 5750(d) to incorporate 
specific initial and continued listing criteria relating to Custom 
Baskets. Specifically, the Exchange proposes to add a new initial 
listing requirement to stipulate that the Exchange will 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 
Exchange Act (``Regulation FD''),\10\ including with respect to any 
Custom Basket.\11\ The Exchange also proposes to add a new continued 
listing requirement 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,\12\ 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.\13\
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    \10\ 17 CFR 243.100.
    \11\ See proposed Nasdaq Rule 5750(d)(1)(B)(iii). 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 NAV per share for the series will be calculated 
daily and that the NAV, the Proxy Basket, and the Fund Portfolio 
will be made available to all market participants at the same time 
when disclosed. The current requirements would be designated as 
Nasdaq Rule 5750(d)(1)(B)(i) and (ii).
    \12\ ``Regular market session'' means the trading session from 
9:30 a.m. until 4:00 p.m. or 4:15 p.m. See Nasdaq Rule 
4120(b)(4)(D).
    \13\ See proposed Nasdaq Rule 5750(d)(2)(A)(ii). Nasdaq Rule 
5750(d)(2)(A) currently provides that the Proxy Basket will be 
publicly disseminated at least once daily and will be made available 
to all market participants at the same time. This current 
requirement would be designated as Nasdaq Rule 5750(d)(2)(A)(i). The 
Exchange also proposes to amend the title of Nasdaq Rule 
5750(d)(2)(A) to ``Proxy Basket and Custom Basket.'' See proposed 
Nasdaq Rule 5750(d)(2)(A).
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    Finally, the Exchange proposes to amend Nasdaq Rules 5750(b)(5) and 
(6), which contain requirements that specified parties must erect and 
maintain ``fire walls'' with respect to access to information 
concerning the Fund Portfolio and Proxy Basket and enact procedures 
designed to prevent the use and dissemination of material nonpublic 
information regarding the Fund Portfolio and Proxy Basket, so that 
these requirements would also cover information concerning Custom 
Baskets. As proposed to be amended, Nasdaq Rule 5750(b)(5) would 
require 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, the Proxy Basket, and/or the Custom 
Basket, as applicable. In addition, 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, and/or the Proxy Basket, and/or the 
Custom Basket, as applicable, or changes thereto. Proposed Nasdaq Rule 
5750(b)(6) would require 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.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Exchange Act and rules and regulations 
thereunder applicable to a national securities exchange.\14\ In 
particular, the

[[Page 57229]]

Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Exchange Act,\15\ 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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    \14\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Exchange previously filed a proposed rule change to adopt 
Nasdaq Rule 5750 to permit the listing and trading of Proxy Portfolio 
Shares.\16\ As discussed above, under the current rule, a series of 
Proxy Portfolio Shares must create or redeem shares in return for the 
Proxy Basket and/or cash. The Exchange is now proposing to amend Nasdaq 
Rule 5750 to allow a series of Proxy Portfolio Shares to create or 
redeem shares in return for a Custom Basket, which is a portfolio of 
securities that is different from the Proxy Basket, to the extent 
consistent with an issuer's exemptive relief under the 1940 Act.\17\ 
For the reasons discussed below, the Commission finds that the proposed 
amendments to Nasdaq Rule 5750 to provide for the use of Custom Baskets 
for Proxy Portfolio Shares, to the extent permitted by an issuer's 
exemptive relief under the 1940 Act, are consistent with Section 
6(b)(5) of the Exchange Act.
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    \16\ See Securities Exchange Act Release No. 89110 (June 22, 
2020), 85 FR 38461 (June 26, 2020) (SR-NASDAQ-2020-032) (Notice of 
Filing and Immediate Effectiveness to Adopt Nasdaq Rule 5750 to List 
and Trade Proxy Portfolio Shares) (``2020 Notice''). At the time, 
the Exchange stated that the proposed rule change to adopt new 
Nasdaq Rule 5750 was substantially similar to a proposed rule change 
by Cboe BZX Exchange, Inc. (``BZX'') to adopt BZX Rule 14.11(m) that 
the Commission had recently approved. See id. at 38461 (citing 
Securities Exchange Act Release No. 88887 (May 15, 2020), 85 FR 
30990 (May 21, 2020) (SR-CboeBZX-2019-107) (``2020 Order'')). The 
Exchange must file a separate proposed rule change pursuant to 
Section 19(b) of the Exchange Act for each series of Proxy Portfolio 
Shares. See Nasdaq Rule 5750(b)(1).
    \17\ In the 2020 Notice, the Exchange identified several 
applications for exemptive relief and subsequent orders granting 
certain exemptive relief under the 1940 Act and stated that it 
believed that each associated series of shares would qualify as 
Proxy Portfolio Shares under proposed Nasdaq Rule 5750. See 2020 
Notice, supra note 16, 85 FR at 38461 n.3. The Commission has since 
granted exemptive relief under the 1940 Act to certain series of 
shares that the Exchange had identified as qualifying as Proxy 
Portfolio Shares to permit the creation or redemption of shares 
using a Custom Basket that includes instruments that are not 
included, or included with different weightings, in the fund's 
equivalent to a Proxy Basket. See, e.g., Fidelity Beach Street 
Trust, et al., Investment Company Act Release No. 34350 (August 5, 
2021).
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    The Commission believes that the proposed changes to Nasdaq Rules 
5750(b)(5) and (6) are consistent with the Exchange Act and are 
reasonably designed to help prevent fraudulent and manipulative acts 
and practices. The Commission notes that, because Proxy Portfolio 
Shares do not publicly disclose on a daily basis information about the 
holdings of the Fund Portfolio, it is vital that key information 
relating to Proxy Portfolio Shares, including information relating to 
Custom Baskets, be kept confidential prior to its public disclosure and 
not be subject to misuse.\18\ Accordingly, the Commission believes that 
the Exchange's proposal to amend Nasdaq Rules 5750(b)(5) and (6) \19\ 
to apply the current ``fire wall'' and other requirements contained 
therein to those that have access to information concerning, or make 
decisions pertaining to, the composition of and/or changes to the 
Custom Baskets, in addition to the existing requirements relating to 
the Fund Portfolio and the Proxy Basket, is designed to prevent fraud 
and manipulation with respect to Proxy Portfolio Shares.
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    \18\ See 2020 Order, supra note 16, 85 FR at 31002-03.
    \19\ See supra Section II, describing proposed Nasdaq Rules 
5750(b)(5) and (6).
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    The Commission also believes that the proposed amendments to the 
initial and continued listing requirements for Proxy Portfolio Shares 
are adequate to ensure transparency of information relating to Custom 
Baskets utilized by a fund and to ensure that such information is 
available to the rest of the market participants at the same time. 
Specifically, prior to the opening of trading on each business day, the 
Investment Company will 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.\20\ In addition, prior to the initial 
listing of the Proxy Portfolio Shares, the Exchange will be required to 
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 FD, 
including with respect to any Custom Basket.\21\ These measures help to 
mitigate concerns that certain information regarding the funds will be 
available only to select market participants and thereby helps to 
prevent fraud and manipulation.
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    \20\ See proposed Nasdaq Rule 5750(d)(2)(A)(ii).
    \21\ See proposed Nasdaq Rule 5750(d)(1)(B)(iii). The Commission 
notes that a fund's use of, or conversations with authorized 
participants about, Creation Baskets that would result in selective 
disclosure of nonpublic information would effectively be limited by 
the fund's obligation to comply with Regulation FD. See, e.g., 
Fidelity Beach Street Trust, et al., Investment Company Act Release 
No. 34326 (July 9, 2021).
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    The Commission notes that, as set forth in the definition of 
``Custom Basket,'' a series of Proxy Portfolio Shares may only utilize 
Custom Baskets to the extent consistent with the exemptive relief 
issued pursuant to the 1940 Act applicable to such series.\22\ The 
Commission further notes that all series of Proxy Portfolio Shares will 
continue to be subject to the existing rules and procedures that govern 
the listing and trading of Proxy Portfolio Shares and the trading of 
equity securities on the Exchange.
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    \22\ See proposed Nasdaq Rule 5750(c)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act \23\ that the proposed rule change (SR-NASDAQ-2021-065), 
be, and it hereby is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-22437 Filed 10-13-21; 8:45 am]
BILLING CODE 8011-01-P