Document ID: SEC-2020-1493-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2020-09-17T04:00Z

[Federal Register Volume 85, Number 181 (Thursday, September 17, 2020)]
[Notices]
[Pages 58090-58093]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20474]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89834; File No. SR-NYSEArca-2020-54]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Amend NYSE Arca Rule 5.3-E to Exempt Issuers 
of Certain Derivative and Special Purpose Securities From Having To 
Obtain Shareholder Approval Prior to the Issuance of Securities in 
Connection With Certain Acquisitions of the Stock or Assets of an 
Affiliated Company

September 11, 2020.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on August 28, 2020, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Arca Rule 5.3-E to exempt 
certain categories of derivative and special purpose securities from 
the requirement to obtain shareholder approval prior to the issuance of 
securities in connection with certain acquisitions of the stock or 
asset of another company. The proposed change is available on the 
Exchange's website at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NYSE Arca Rule 5.3-E(d)(9) requires issuers to obtain shareholder 
approval in connection with the acquisition of the stock or assets of 
another company, in the following circumstances:
    (i) If any director, officer, or substantial shareholder of the 
listed company has a 5% or greater interest (or such persons 
collectively have a 10% or greater interest), directly or indirectly, 
in the company or assets to be acquired or in the consideration to be 
paid in the transaction (or series of related transactions) and the 
present or potential issuance of common stock, or securities 
convertible into or exercisable for common stock, could result in an 
increase in outstanding common shares or voting power of 5% or more; or
    (ii) where the present or potential issuance of common stock, or 
securities convertible into or exercisable for common stock (other than 
in a public offering for cash), could result in an increase in 
outstanding common shares of 20% or more or could represent 20% or more 
of the voting power outstanding before the issuance of such stock or 
securities.
    The Exchange proposes to exempt issuers of certain categories of 
derivative and special purpose securities \4\ from

[[Page 58091]]

having to comply with this requirement when they issue securities in 
connection with the acquisition of the stock or assets of an affiliated 
company in a transaction that does not require shareholder approval 
under Rule 17a-8 \5\ (Mergers of affiliated companies) under 1940 Act 
(``Rule 17a-8''). In general, the requirement to obtain shareholder 
approval prior to the issuance of securities in connection with certain 
acquisitions of the stock or asset of another company is designed to 
give existing shareholders a vote on the issuance of stock that may 
dilute their voting or economic rights. The Exchange notes that NYSE 
Arca Rule 5.3-E(d)(9) is also intended to give shareholders a vote on 
transactions where a director, officer, or substantial shareholder of 
the listed company has a significant interest in the company or assets 
to be acquired or the consideration to be paid and therefore may 
benefit from the transaction. Due to the unique nature of 1940 Act 
Securities as well as the requirements under Rule 17a-8, the Exchange 
believes that these concerns are limited with respect to the holders of 
such securities. Therefore, if shareholder approval is not required 
under Rule 17a-8, the Exchange believes it is appropriate to exempt 
issuers of 1940 Act Securities from having to obtain shareholder 
approval under Exchange rules which can be both time consuming and 
expensive.
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    \4\ The Exchange proposes to exempt the following categories of 
derivative and special purpose securities: Securities listed 
pursuant to Rules 5.2-E(h) (Unit Investment Trusts), 5.2-E(j)(3) 
(Investment Company Units), 5.2-E(j)(8) (Exchange-Traded Fund 
Shares), 8.100-E (Portfolio Depositary Receipts), 8.600-E (Managed 
Fund Shares), 8.601-E (Active Proxy Portfolio Shares) and 8.900-E 
(Managed Portfolio Shares) (collectively, the ``1940 Act 
Securities''). Each of the aforementioned categories of derivative 
and special purpose securities are issued by an entity organized 
under the Investment Company Act of 1940 (the ``1940 Act'').
    \5\ 17 CRF 270.17a-8.
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    The Exchange believes that the potential economic dilution concerns 
sometimes associated with a large share issuance are unlikely to be 
present when an issuer of a 1940 Act Security issues shares in 
connection with the acquisition of the stock or assets of an affiliated 
company. As described above, the proposed exemption will only apply to 
issuers of derivative and special purpose securities organized under 
the 1940 Act.\6\ Rule 17a-8 specifies that in connection with the 
merger of affiliated investment companies, the board of directors of 
each investment company, including a majority of the directors that are 
not interested persons of the respective investment company, must 
affirmatively determine that (i) participation in the merger is in the 
best interest of their respective investment company, and (ii) the 
interests of their shareholders will not be diluted as a result of the 
transaction.\7\ Because the board of directors must make an affirmative 
determination that the merger is not dilutive to existing shareholders, 
the shares issued by the acquiring investment company are issued at a 
price equal to the fund's net asset value.\8\ While the Exchange notes 
that the shares are issued at a fund's net asset value when the fund is 
registered, the requirements of Rule 17a-8 also protect against 
dilution when the fund to be acquired is unregistered. Specifically, 
Rule 17a-8(a)(2)(iii) requires that where a fund is acquiring the 
assets of an unregistered fund, the board have procedures in place for 
the valuation of assets. Such procedures must include procedures that 
provide for a report to be prepared by an independent evaluator to 
provide a valuation for assets to be acquired.
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    \6\ Approximately 88% of securities listed on the Exchange are 
issued by investment companies registered under the 1940 Act.
    \7\ 17 CRF 270.17a-8.
    \8\ The Exchange notes that the proposing releases for Rule 17a-
8 specifically contemplated that, in certain circumstances, the 
price paid may deviate from a fund's net asset value due to 
adjustments for tax purposes. See Investment Company Act Release No. 
25259 at Footnote 26.
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    The Exchange believes that the same provisions of Rule 17a-8 that 
protect against economic dilution also provide safeguards for existing 
shareholders when the transaction involves a director, officer, or 
substantial shareholder of the listed company that has a significant 
interest in the company or assets to be acquired or the consideration 
to be paid and therefore may benefit from the transaction. Because the 
board must make an affirmative decision that the transaction is in the 
best interest of its shareholders and that the transaction will not 
result in economic dilution for existing shareholders, the is reduced 
concern that existing shareholders will be disenfranchised as a result 
of the Exchange's proposed exemption.
    The Exchange further believes that it is appropriate to exempt an 
issuer of 1940 Act Securities from the shareholder approval 
requirements of NYSE Arca Rule 5.3-E(d)(9) in the very limited 
circumstance where a company issues securities in connection with the 
acquisition of the stock or assets of an affiliated company in a 
transaction that does not require shareholder approval under Rule 17a-
8. In fact, Rule 17a-8 already considered whether shareholders of 1940 
Act Securities should have the right to vote on a transaction that 
falls under this rule and enumerates circumstances when shareholder 
approval is required and when it is not. Specifically, Rule17a-8 
exempts the acquiring company from obtaining shareholder approval in 
such scenario if: (i) No policy of the acquiring company that could not 
be changed without a vote of its outstanding voting securities is 
materially different from a policy of the merged company, (ii) no 
advisory contract between the acquiring company and any investment 
adviser thereof is materially different from an advisory contract 
between the merged company and any investment adviser thereof, except 
for the identity of the investment companies as a party to the 
contract, (iii) directors of the acquiring company, who are not 
interested persons of the acquiring company, and who were elected by 
the shareholders of the acquiring company, will comprise a majority of 
the directors of the merged company, who are not interested persons of 
the merged company, and (iv) any distribution fees (as a percentage of 
the company's average net assets) authorized to be paid by the merged 
company pursuant to a plan adopted in accordance with Rule 12b-1 under 
the 1940 Act are no greater than the distribution fee (as a percentage 
of the company's average net assets) authorized to be paid by the 
acquiring company, pursuant to such plan. Given that the 1940 Act 
already prescribes when an issuer of 1940 Act Securities must obtain 
shareholder approval in the context of a merger of affiliated 
companies, the Exchange believes it is appropriate to exempt issuers of 
1940 Act Securities from having to comply with NYSE Arca Rule 5.3-
E(d)(9) when completing a transaction that does not require shareholder 
approval under Rule 17a-8.
    As described above, the Exchange only proposes to exempt issuers of 
1940 Act Securities from having to comply with NYSE Arca Rule 5.3-
E(d)(9) if they are issuing shares to acquire the stock or assets of an 
affiliated company and such issuance would not require shareholder 
approval under Rule 17a-8. Notwithstanding the proposed exemption, the 
Exchange notes that other provisions of Exchange rules or the 1940 Act 
may require shareholder approval and will still apply.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act,\9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Exchange Act,\10\ in particular in 
that it is designed to promote just and equitable principles of

[[Page 58092]]

trade, to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, 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 and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed amendment is consistent 
with the protection of investors, as the unique nature of 1940 Act 
Securities, as well as protections afforded by Rule 17a-8, means that 
(i) there is little risk of economic dilution to existing shareholders 
as a result of an issuance of shares by an issuer of 1940 Act 
Securities in connection with the acquisition of the stock or assets of 
an affiliated company, and (ii) existing shareholders are unlikely to 
be disenfranchised as a result of a Rule 17a-8--compliant transaction 
that involves a director, officer, or substantial shareholder of the 
listed company that has a significant interest in the company or assets 
to be acquired or the consideration to be paid.
    The Exchange further believes its proposal is consistent with the 
protection of investors because its proposal is limited to issuers of 
derivative and special purpose securities that are organized under the 
1940 Act that are completing a transaction that does not require 
shareholder approval under Rule 17a-8. In the case of a merger of 
affiliated investment companies, the board of directors of each 
investment company, including a majority of the directors that are not 
interested persons of the respective investment company, must 
affirmatively determine that (i) participation in the merger is in the 
best interest of their respective investment company, and (ii) the 
interests of their shareholders will not be diluted as a result of the 
transaction. Because the interests of shareholders in such a 
transaction cannot be diluted, shares issues by one investment company 
to acquire the stock or assets of an affiliated investment company are 
issued at a price equal to the acquiring fund's net asset value. 
Because of the safeguards embedded in Rule 17a-8, as described above, 
the Exchange also believes that there are reduced concerns about 
economic dilution when the transaction involves a merger with an 
affiliate unregistered fund.
    The Exchange believes that the same provisions of Rule 17a-8 that 
protect against economic dilution also provide safeguards for existing 
shareholders when the transaction involves a director, officer, or 
substantial shareholder of the listed company that has a significant 
interest in the company or assets to be acquired or the consideration 
to be paid and therefore may benefit from the transaction. Because the 
board must make an affirmative decision that the transaction is in the 
best interest of its shareholders and that the transaction will not 
result in economic dilution for existing shareholders, the is reduced 
concern that existing shareholders will be disenfranchised as a result 
of the Exchange's proposed exemption.
    In addition to requiring the board determinations described above, 
Rule 17a-8 also exempts the acquiring company from having to obtain 
shareholder approval prior to merging with an affiliated company 
provided certain conditions are met. Specifically, Rule 17a-8 exempts 
the acquiring company from obtaining shareholder approval in such 
scenario if: (i) No policy of the acquiring company that could not be 
changed without a vote of its outstanding voting securities is 
materially different from a policy of the merged company, (ii) no 
advisory contract between the acquiring company and any investment 
adviser thereof is materially different from an advisory contract 
between the merged company and any investment adviser thereof, except 
for the identity of the investment companies as a party to the 
contract, (iii) directors of the acquiring company, who are not 
interested persons of the acquiring company, and who were elected by 
the shareholders of the acquiring company, will comprise a majority of 
the directors of the merged company, who are not interested persons of 
the merged company, and (iv) any distribution fees (as a percentage of 
the company's average net assets) authorized to be paid by the merged 
company pursuant to a plan adopted in accordance with Rule 12b-1 under 
the 1940 Act are no greater than the distribution fee (as a percentage 
of the company's average net assets) authorized to be paid by the 
acquiring company, pursuant to such plan.
    Notwithstanding the proposed exemption described above, the 
Exchange notes that other provisions of Exchange rules or the 1940 Act 
may require shareholder approval and will still apply.
    The Exchange believes it is not unfairly discriminatory to offer 
the exemption only to issuers of 1940 Act Securities completing a 
transaction in compliance with Rule 17a-8, as opposed to all issuers of 
derivative and special purpose securities, because only 1940 Act 
Securities are subject to the requirements of the 1940 Act which offer 
the protections against dilution and self-dealing described herein.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed amendment will 
not impose any burden on competition, as they simply propose to offer 
1940 Act Securities a limited exemption for the Exchange's shareholder 
approval rule in a specific circumstance where the Exchange believes 
there is a low risk of dilution to existing shareholders.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-2020-54 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.

[[Page 58093]]

All submissions should refer to File Number SR-NYSEArca-2020-54. 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-2020-54 and should be submitted 
on or before October 8, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20474 Filed 9-16-20; 8:45 am]
BILLING CODE 8011-01-P