Document ID: SEC-2019-1450-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2019-10-07T04:00Z

[Federal Register Volume 84, Number 194 (Monday, October 7, 2019)]
[Notices]
[Pages 53522-53525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21727]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87190; File No. SR-NYSEArca-2019-57]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change To List and Trade Shares of the 
Franklin Liberty Systematic Style Premia ETF, a Series of the Franklin 
Templeton ETF Trust Under NYSE Arca Rule 8.600-E

October 1, 2019.

I. Introduction

    On August 8, 2019, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 
(``Act'') \2\ and Rule 19b-4 thereunder,\3\ a proposed rule change to 
list shares (``Shares'') of the Franklin Liberty Systematic Style 
Premia ETF (``Fund'') under NYSE Arca Rule 8.600-E. The proposed rule 
change was published for comment in the Federal Register on August 20, 
2019.\4\ The Commission has received no comments on the proposed rule 
change. This order approves the proposed rule change.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 86659 (Aug. 8, 
2019), 84 FR 43196 (``Notice'').
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II. Summary of the Exchange's Description of the Proposed Rule Change 
\5\
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    \5\ For more information regarding the Fund and the Shares, see 
Notice, supra note 4.
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    The Exchange proposes to list and trade the Shares under NYSE Arca 
Rule 8.600-E, which governs the listing and trading of Managed Funds 
Shares on the Exchange. The Fund is a series of the Franklin Templeton 
ETF Trust (``Trust'').\6\ Franklin Advisers, Inc. (``Adviser'') will be 
the investment adviser to the Fund.\7\ Franklin

[[Page 53523]]

Templeton Distributors, Inc. will be the distributor of the Shares. 
State Street Bank and Trust Company will be the custodian and transfer 
agent for the Fund. According to the Exchange, the Fund will seek to 
provide absolute return.
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    \6\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On July 31, 2019, the Trust filed a 
registration statement on Form N-1A relating to the Fund (File Nos. 
333-208873 and 811-23124).
    \7\ The Exchange states that the Adviser is not registered as a 
broker-dealer but is affiliated with a broker-dealer and has 
implemented and will maintain a fire wall with respect to such 
broker-dealer affiliate regarding access to information concerning 
the composition and/or changes to the portfolio. In the event (a) 
the Adviser becomes registered as a broker-dealer or newly 
affiliated with one or more broker-dealers, or (b) any new adviser 
or sub-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 its broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to the portfolio, and will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding such portfolio.
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    According to the Exchange, the Fund's portfolio will not meet the 
generic listing requirements of Commentary .01(e) to NYSE Arca Rule 
8.600-E, which requires that, on both an initial and a continuing 
basis, no more than 20% of the assets in the Fund's portfolio may be 
invested in OTC derivatives (calculated as the aggregate gross notional 
value of the OTC derivatives). The Exchange states that the aggregate 
gross notional value of the Fund's investments in OTC derivatives is 
expected to exceed this limit. The Exchange states that, other than 
Commentary .01(e) to Rule 8.600-E, the Shares will meet all other 
requirements of Rule 8.600-E.

A. Principal Investments

    According to the Exchange, under normal market conditions,\8\ at 
least 80% of the Fund's assets will be invested in the securities and 
financial instruments described below.
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    \8\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
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    The Fund may invest in the following derivatives: (1) Futures 
contracts on U.S. and foreign equity, interest rate/bond and commodity 
indices; (2) U.S. and foreign equity and commodity-linked total return 
swaps; and (3) currency forward contracts. The Fund may hold its 
commodity-linked derivative instruments indirectly through a wholly-
owned subsidiary established in the Cayman Islands (``Subsidiary''). 
The Subsidiary will only invest in commodity-linked total return swaps 
and futures on commodity indices and will also hold any necessary cash 
or cash equivalents as collateral. No more than 25% of the Fund's total 
assets may be invested in the Subsidiary.
    The Fund may hold cash and cash equivalents.\9\
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    \9\ The term ``cash equivalents'' is defined in Commentary 
.01(c) to NYSE Arca Rule 8.600-E.
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    The Fund may hold U.S. and foreign bonds (including convertible 
bonds), debentures and non-cash equivalent U.S. government securities 
(other than debt securities with variable interest rates, as referenced 
below).
    The Fund may hold U.S. and foreign exchange-traded common stock, 
preferred stock (including convertible preferred stock), rights and 
warrants of U.S. and foreign companies.
    The Fund may engage in short sales in securities and financial 
instruments in which the Fund may invest, including short sales 
``against the box.'' \10\
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    \10\ According to the Exchange, short sales ``against the box'' 
are transactions in which the Fund sells a security short but it 
also owns an equal amount of the securities sold short or owns 
securities that are convertible or exchangeable, without payment of 
further consideration, into an equal amount of such security.
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B. Other Investments

    While the Fund, under normal market conditions, will invest at 
least 80% of its assets in the securities and financial instruments 
described above, the Fund may invest its remaining assets in other 
assets and financial instruments, as described below.
    The Fund may invest in ETFs.\11\
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    \11\ The Exchange states that, for purposes of this filing, 
``ETFs'' are 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 invest in U.S. and foreign corporate debt.
    The Fund may invest in foreign governmental and supranational debt 
securities.
    The Fund may invest in U.S. and foreign exchange-listed and non-
exchange-traded ``Depositary Receipts''.\12\
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    \12\ According to the Exchange, many securities of foreign 
issuers are represented by American Depositary Receipts (ADRs), 
Global Depositary Receipts (GDRs), and European Depositary Receipts 
(EDRs) (collectively, ``Depositary Receipts''). Generally, 
Depositary Receipts in registered form are designed for use in the 
U.S. securities market and Depositary Receipts in bearer form are 
designed for use in securities markets outside the U.S. ADRs 
evidence ownership of, and represent the right to receive, 
securities of foreign issuers deposited in a domestic bank or trust 
company or a foreign correspondent bank. Prices of ADRs are quoted 
in U.S. dollars, and ADRs are traded in the U.S. on exchanges or 
over-the-counter. EDRs and GDRs are typically issued by foreign 
banks or trust companies and evidence ownership of underlying 
securities issued by either a foreign or a U.S. corporation. EDRs 
and GDRs may not necessarily be denominated in the same currency as 
the underlying securities into which they may be converted. No more 
than 10% of the equity weight of the Fund's portfolio will be 
invested in non-exchange-traded ADRs.
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    The Fund may invest in the following debt securities with variable 
interest rates: Floating rate, adjustable rate and inverse floating 
rate debt securities.
    The Fund and the Subsidiary will not invest in securities or other 
financial instruments that have not been described in this proposed 
rule change.

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, while the Fund will be permitted to borrow as 
permitted under the 1940 Act, the Fund's investments will not be used 
to seek performance that is the multiple or inverse multiple (e.g., 2Xs 
and 3Xs) of the Fund's primary broad-based securities benchmark index 
(as defined in Form N-1A).\13\
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    \13\ The Fund's broad-based securities benchmark index will be 
identified in a future amendment to the Registration Statement 
following the Fund's first full calendar year of performance.
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D. Failure To Satisfy Commentary .01(e) to NYSE Arca Rule 8.600-E

    Commentary .01(e) to Rule 8.600-E requires that an actively managed 
fund whose shares are generically listed must not invest more than 20% 
of its assets (calculated as the aggregate gross notional value of the 
OTC derivatives) in OTC derivatives on both an initial and a continuing 
basis.
    The Exchange states that, based on the Fund's investment 
strategies, the Fund's exposure to foreign currency forward 
transactions and U.S. and foreign equity and commodity-linked total 
return swaps (which swaps will be traded OTC) is expected to exceed 20% 
of the Fund's assets.\14\ According to the Exchange, this will provide 
the Fund with additional flexibility to manage risk associated with its 
investments. The Exchange states that, depending on market conditions, 
it may be critical that the Fund utilize available OTC swaps and 
currency forwards to efficiently gain exposure to equities, currencies 
and commodities, in furtherance of the Fund's investment objective. The 
Exchange states that because foreign currency forward transactions and 
total

[[Page 53524]]

return swaps will be traded OTC, it is not possible to implement these 
strategies efficiently using listed derivatives. According to the 
Exchange, swaps on equity securities may be an important means to 
reduce risk in the Fund's equity investments, or, depending on market 
conditions, to enhance returns of such investments. The Exchange states 
that, if the Fund were limited to investing up to 20% of assets in OTC 
derivatives, the Fund would have to exclude or underweight these 
strategies and would be less diversified, concentrating risk in its 
other strategies.
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    \14\ According to the Fund, the Adviser and its affiliates 
actively monitor counterparty credit risk exposure (including for 
OTC derivatives) and evaluate counterparty credit quality on a 
continuous basis.
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    The Exchange states the proposed exception to Commentary .01(e) to 
Rule 8.600-E would be consistent with other funds that the Commission 
has approved for listing and trading on an exchange.\15\
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    \15\ See, e.g., Securities Exchange Act Release Nos. 82492 
(January 12, 2018), 83 FR 2850 (January 19, 2018) (SR-NYSEArca-2017-
87) (approving a proposed rule change to list and trade shares of 
the JPMorgan Long/Short ETF under NYSE Arca Rule 8.600-E, which 
provides that the aggregate gross notional value of the Fund's 
investments in OTC derivatives may exceed 20%); 79683 (December 23, 
2016), 81 FR 96539 (December 30, 2016) (SR-NYSEArca-2016-82); 77904 
(May 25, 2016), 81 FR 35101 (June 1, 2016) (SR-NYSEArca-2016-17)
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and rules and regulations thereunder 
applicable to a national securities exchange.\16\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\17\ 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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    \16\ 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).
    \17\ 15 U.S.C. 78f(b)(5).
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    As noted above, the Exchange proposes that the aggregate gross 
notional value of the Fund's investments in OTC derivatives may exceed 
the 20% limit in Commentary .01(e) to NYSE Arca Rule 8.600-E. The 
Exchange believes that this exception is generally consistent with 
previous filings for the listing of ETFs approved by the 
Commission.\18\ 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. The Exchange represents that the 
Fund's disclosure of its derivative positions in the Disclosed 
Portfolio will include information that market participants can use to 
value the derivative positions intraday.\19\ The website information 
will be publicly available at no charge.\20\
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    \18\ See supra note 15. See also Securities Exchange Act Release 
No. 82080 (November 15, 2017), 82 FR 55449 (November 21, 2017) 
(approving a proposed rule change to list and trade shares of the 
JPMorgan Managed Futures ETF under NYSE Arca Rule 8.600-E, which 
provides that the aggregate gross notional value of the investments 
in OTC derivatives may exceed 20% of the fund's assets).
    \19\ See Notice, supra note 4, 84 FR at 43199.
    \20\ See id.
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    The Commission also believes that the proposal is reasonably 
designed to promote fair disclosure of information that may be 
necessary to price the Shares appropriately and to prevent trading when 
a reasonable degree of transparency cannot be assured. The Exchange 
will obtain a representation from the issuer of the Shares that the NAV 
per Share will be calculated daily and that the NAV and the Disclosed 
Portfolio will be made available to all market participants at the same 
time. Trading in the Shares will be halted if the circuit-breaker 
parameters in NYSE Arca Rule 7.12-E have been reached. Trading also may 
be halted because of market conditions or for reasons that, in the view 
of the Exchange, make trading in the Shares inadvisable. Moreover, 
trading in the Shares will be subject to NYSE Arca Rule 8.600-
E(d)(2)(D), which sets forth circumstances under which Shares may be 
halted.
    The Exchange states that the Adviser is not registered as a broker-
dealer but is affiliated with a broker-dealer and has implemented and 
will maintain a fire wall with respect to that broker-dealer affiliate 
regarding access to information concerning the composition of and/or 
changes to the Fund's portfolio. Further, the Commission notes that the 
Reporting Authority that provides the Disclosed Portfolio must 
implement and maintain, or be subject to, procedures designed to 
prevent the use and dissemination of material, non-public information 
regarding the actual components of the portfolio.\21\ The Exchange 
states that it has a general policy prohibiting the distribution of 
material, non-public information by its employees.
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    \21\ See NYSE Arca Rule 8.600-E(d)(2)(B)(ii).
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    The Commission also finds that the proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\22\ which sets forth Congress's 
finding that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure the availability to brokers, dealers, and investors of 
information with respect to quotations for, and transactions in, 
securities. Quotation and last-sale information for the Shares will be 
available via the CTA high-speed line. The Portfolio Indicative Value 
(``PIV'') for the Fund, as defined in NYSE Arca Rule 8.600-E(c)(3), 
will be widely disseminated by one or more major market data vendors at 
least every 15 seconds during the Exchange's Core Trading Session.\23\ 
Information regarding market price and trading volume for the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers.
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    \22\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \23\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available PIVs 
taken from the CTA or other data feeds. See Notice, supra note 4, 84 
FR at 43201, n.20.
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    Quotation and last-sale information for portfolio holdings of the 
Fund that are U.S. exchange-listed, including common stocks, preferred 
stocks, warrants, rights, ETFs, and U.S. exchange-traded Depositary 
Receipts will be available via the CTA high speed line. Quotation and 
last sale information for such U.S. exchange-listed securities, as well 
as U.S. and foreign exchange-traded futures will be available from the 
exchanges on which they are listed and from major market data vendors. 
Quotation information for cash equivalents, bonds, debentures, swaps, 
foreign governmental and supranational debt securities, U.S. Government 
securities, debt securities with variable interest rates and U.S. and 
foreign corporate debt may be obtained from brokers and dealers who 
make markets in such securities or through nationally recognized 
pricing services through subscription agreements. The U.S. dollar value 
of foreign securities, instruments and currencies can be derived by 
using foreign currency exchange rate quotations obtained from 
nationally recognized pricing services. Price information for non-
exchange-traded Depositary Receipts is available from major market data 
vendors.
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. In support of this 
proposal, the Exchange represents that:

[[Page 53525]]

    (1) Other than Commentary .01(e) to Rule 8.600-E, the Shares will 
meet all other requirements of Rule 8.600-E.
    (2) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    (3) Trading in the Shares will be subject to the existing trading 
surveillances administered by the Exchange, as well as cross-market 
surveillances administered by the Financial Industry Regulatory 
Authority (``FINRA'') on behalf of the Exchange, and these procedures 
are adequate to properly monitor Exchange trading of the Shares in all 
trading sessions and to deter and detect violations of Exchange rules 
and applicable federal securities laws.\24\
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    \24\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
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    (4) The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares, certain 
exchange-listed equity securities, certain futures, and certain 
exchange-traded options with other markets and other entities that are 
members of the Intermarket Surveillance Group (``ISG''), and the 
Exchange or FINRA, on behalf of the Exchange, or both, may obtain 
trading information regarding trading such securities and financial 
instruments from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in such securities 
and financial instruments from markets and other entities that are 
members of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement. FINRA, on behalf of the Exchange, is 
able to access, as needed, trade information for certain fixed income 
securities held by the Fund reported to FINRA's Trade Reporting and 
Compliance Engine.
    (5) Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit Holders in an Information Bulletin of the 
special characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss: (a) The procedures 
for purchases and redemptions of Shares in creation units (and that 
Shares are not individually redeemable); (b) NYSE Arca Rule 9.2-E(a), 
which imposes a duty of due diligence on its Equity Trading Permit 
Holders to learn the essential facts relating to every customer prior 
to trading the Shares; (c) the risks involved in trading the Shares 
during the Early and Late Trading Sessions when an updated PIV will not 
be calculated or publicly disseminated; (d) how information regarding 
the PIV and the Disclosed Portfolio is disseminated; (e) the 
requirement that Equity Trading Permit Holders deliver a prospectus to 
investors purchasing newly issued Shares prior to or concurrently with 
the confirmation of a transaction; and (f) trading information.
    (6) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (7) For initial and continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Act.\25\
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    \25\ See 17 CFR 240.10A-3.
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    (8) The Fund's investments, including derivatives, will be 
consistent with the Fund's investment objective and will not be used to 
enhance leverage. That is, while the Fund will be permitted to borrow 
as permitted under the 1940 Act, the Fund's investments will not be 
used to seek performance that is the multiple or inverse multiple 
(e.g., 2Xs and 3Xs) of the Fund's primary broad-based securities 
benchmark index (as defined in Form N-1A).
    The Exchange represents that all statements and representations 
made in the filing regarding: (1) The description of the portfolio 
holdings or reference assets; (2) limitations on portfolio holdings or 
reference assets; or (3) the applicability of Exchange listing rules 
specified in the rule filing constitute continued listing requirements 
for listing the Shares on the Exchange. In addition, the Exchange 
represents that the issuer must notify the Exchange of any failure by 
the Fund to comply with the continued listing requirements and, 
pursuant to its obligations under Section 19(g)(1) of the Act, the 
Exchange will monitor \26\ 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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    \26\ 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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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \27\ and 
Section 11A(a)(1)(C)(iii) of the Act \28\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NYSEArca-2019-57), be, and 
it hereby is, approved.
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    \29\ 15 U.S.C. 78s(b)(1).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21727 Filed 10-4-19; 8:45 am]
 BILLING CODE 8011-01-P