Document ID: SEC-2019-0937-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2019-07-03T04:00Z

[Federal Register Volume 84, Number 128 (Wednesday, July 3, 2019)]
[Notices]
[Pages 31968-31970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14162]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86220; File No. SR-NYSEArca-2019-14]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change Relating to the Permitted Investments of the PGIM Ultra 
Short Bond ETF

June 27, 2019.
    On March 13, 2019, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
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 
make certain changes to the listing rule for shares (``Shares'') of the 
PGIM Ultra Short Bond ETF (``Fund''). The proposed rule change was 
published for comment in the Federal

[[Page 31969]]

Register on April 2, 2019.\3\ On May 10, 2019, 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 pursuant to 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. 85430 (Mar. 27, 
2019), 84 FR 12646 (Apr. 2, 2019) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85829 (May 10, 
2019), 84 FR 22221 (May 16, 2019). The Commission designated July 1, 
2019, as the date by which the Commission shall approve or 
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. Description of the Proposal

A. The Fund and the Shares

    According to the Exchange, the investment objective of the Fund is 
to seek total return through a combination of current income and 
capital appreciation, consistent with preservation of capital. The Fund 
seeks to achieve its investment objective by investing primarily in a 
portfolio of U.S. dollar denominated short-term fixed, variable and 
floating rate debt instruments. Under normal market conditions,\7\ the 
Fund invests at least 80% of its net assets (plus any borrowings for 
investment purposes) in a portfolio of financial instruments consisting 
of (1) the Principal Investment Instruments (as defined in the First 
Prior Order); and (2) derivatives (as described in the Prior Orders) 
that (a) provide exposure to such Principal Investment Instruments, or 
(b) are used to enhance returns, manage portfolio duration, or manage 
the risk of securities price fluctuations, as described in the Prior 
Orders.\8\
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    \7\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
    \8\ The terms ``First Prior Order'' and ``Prior Orders'' are 
defined infra at note 10.
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    The Shares commenced trading on the Exchange on April 10, 2018, 
pursuant to the generic listing standards under Commentary .01 to NYSE 
Arca Rule 8.600-E (``Managed Fund Shares'').\9\ Since then, the 
Exchange has proposed--and the Commission has approved--two proposed 
rule changes to expand the permitted investments of the Fund beyond 
what is permitted under the generic listing requirements.\10\ By the 
instant proposed rule change, the Exchange proposes to again amend the 
listing rule applicable to the Shares.
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    \9\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) 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. In contrast, an open-end 
investment company that issues Investment Company Units, listed and 
traded on the Exchange under NYSE Arca Rule 5.2-E(j)(3), seeks to 
provide investment results that correspond generally to the price 
and yield performance of a specific foreign or domestic stock index, 
fixed income securities index or combination thereof.
    \10\ See Securities Exchange Act Release Nos. 83319 (May 24, 
2018), 83 FR 25097 (May 31, 2018) (SR-NYSEArca-2018-15) (``First 
Prior Order''); and 84818 (December 13, 2018) (SR-NYSEArca-2018-75) 
(together with the First Prior Order, ``Prior Orders'').
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B. The Proposed Modifications to the Shares' Listing Rule

    The Exchange proposes to amend two requirements of the Shares' 
current listing rule as set forth in the First Prior Order, namely the 
requirements that: (1) The Fund's investments in non-U.S. Government, 
non-agency, non-GSE and other privately issued asset backed securities 
(including mortgage-backed securities) (``Private ABS/MBS'') are 
limited to 20% of the total assets of the Fund; \11\ and (2) the Fund 
may invest only 10% of its total assets in fixed income securities that 
do not satisfy the criteria of Commentary .01(b)(4) to NYSE Arca Rule 
8.600-E.\12\
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    \11\ At the time the proposed rule change was filed, Commentary 
.01(b)(5) to NYSE Arca Rule 8.600-E provided that non-agency, non-
government sponsored entity and privately issued mortgage-related 
and other asset-backed securities components of a portfolio may not 
account, in the aggregate, for more than 20% of the weight of the 
fixed income portion of the portfolio. Recently, however, the 
Exchange amended Commentary .01(b)(5) to NYSE Arca Rule 8.600-E, and 
it now provides that non-agency, non-government sponsored entity and 
privately issued mortgage-related and other asset-backed securities 
components of a portfolio may not account, in the aggregate, for 
more than 20% of the weight of the portfolio. See Securities 
Exchange Act Release No. 86017 (June 3, 2019), 84 FR 26711 (June 7, 
2019) (SR-NYSEArca-2019-06).
    \12\ Commentary .01(b)(4) requires that at least 90% of the 
fixed income weight of the portfolio must be either: (a) From 
issuers that are required to file reports pursuant to Sections 13 
and 15(d) of the Act; (b) from issuers that have a worldwide market 
value of its outstanding common equity held by non-affiliates of 
$700 million or more; (c) from issuers that have outstanding 
securities that are notes, bonds debentures, or evidence of 
indebtedness having a total remaining principal amount of at least 
$1 billion; (d) exempted securities as defined in Section 3(a)(12) 
of the Act; or (e) from issuers that are a government of a foreign 
country or a political subdivision of a foreign country.
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    The Exchange proposes to modify the Fund's current limit on Private 
ABS/MBS by removing collateralized debt obligations (``CDOs'') \13\ 
from the definition of Private ABS/MBS and by allowing the Fund to 
invest up to 20% of its total assets in CDOs. Therefore, the Exchange 
is proposing to allow up to 40% of the Fund's portfolio to be composed 
of what had previously been defined as Private ABS/MBS. The Exchange 
asserts that ability to invest up to 20% of the Fund's portfolio CDOs 
would help the Fund maintain portfolio diversification and would reduce 
manipulation risk.\14\ The Exchange argues that CDOs can be 
distinguished from asset backed securities (``ABS'') because CDOs are 
collateralized by bank loans or by corporate or government fixed income 
securities, while ABS are collateralized by consumer and other loans 
(including student loans) made by non-bank lenders.\15\ Additionally, 
the Exchange states that the Fund's investments in CDOs would be 
subject to the Fund's liquidity procedures, and that the Fund's 
investment adviser does not expect that such investments would 
materially impact the liquidity of the Fund's investments.\16\
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    \13\ The Exchange defines CDOs as collateralized loan 
obligations (``CLOs'') and collateralized bond obligations 
(``CBOs''). The Exchange defines CLOs as securities issued by a 
trust or other special purpose entity that are collateralized by a 
pool of loans by U.S. banks and participations in loans by U.S. 
banks that are unsecured or secured by collateral other than real 
estate. The Exchange defines CBOs as securities issued by a trust or 
other special purpose entity that are backed by a diversified pool 
of fixed income securities issued by U.S. or foreign governmental 
entities or fixed income securities issued by U.S. or corporate 
issuers.
    \14\ See Notice, supra note 3, 84 FR at 12647-48.
    \15\ See id. at 12647, n.12.
    \16\ See id. at 12648.
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    Additionally, with respect to the requirement the Fund may invest 
only up to 10% of its total assets in fixed income securities that do 
not satisfy the criteria of Commentary .01(b)(4), the Exchange proposes 
that the Fund's Private ABS/MBS (which may constitute up to 20% of the 
portfolio) and CDOs (which also may constitute up to 20% of the 
portfolio) would not count toward that 10% limit. As a result, up to 
50% of the Fund's fixed income securities might not satisfy the 
criteria in Commentary .01(b)(4). The Exchange argues that this 
alternative limit is appropriate because the criteria in Commentary 
.01(b)(4) ``do not appear to be designed for structured finance 
vehicles such as Private ABS/MBS.'' \17\
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    \17\ Id.
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    The Exchange proposes no other changes to the Shares' listing rule.

[[Page 31970]]

II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2019-14 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \18\ 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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    \18\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\19\ 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.'' \20\
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    \19\ Id.
    \20\ 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,\21\ in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views.
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    \21\ See Notice, supra note 3.
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    If the listing rule for the Shares were amended as proposed, would 
the listing rule continue to ensure that a substantial portion of the 
Fund's portfolio consists of fixed income securities for which 
information is publicly available? If not, are there reasons why it may 
not be necessary that information be publicly available for Private 
ABS/MBS and CDOs (as distinguished from other types of fixed income 
securities)?
    Would the proposed increased investment in Private ABS/MBS and CDOs 
by the Fund increase the susceptibility of the Shares to manipulation? 
If so, why; if not, why not? If the Fund's permitted investments were 
expanded to the extent proposed, would any other restrictions on the 
Fund's permitted investments be appropriate in order for the proposed 
rule change to be consistent with Section 6(b)(5) of the Act?

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.\22\
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    \22\ Section 19(b)(2) of the Act, as amended by the Securities 
Act 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 Act 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 July 24, 2019. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by August 7, 
2019. 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-2019-14 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-2019-14. 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-2019-14 and should be submitted 
by July 24, 2019. Rebuttal comments should be submitted by August 7, 
2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14162 Filed 7-2-19; 8:45 am]
 BILLING CODE 8011-01-P