Document ID: SEC-2021-0744-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2021-05-20T04:00Z

[Federal Register Volume 86, Number 96 (Thursday, May 20, 2021)]
[Notices]
[Pages 27487-27490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10606]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91901; File No. SR-NYSEArca-2020-54]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 2, To Amend NYSE 
Arca Rule 5.3-E To Exempt Registered Investment Companies That List 
Certain Categories of the Securities Defined as Derivative and Special 
Purpose Securities Under NYSE Arca Rules 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 
Registered Investment Company

May 14, 2021.

I. Introduction

    On August 28, 2020, 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 
amend NYSE Arca Rule 5.3-E (Corporate Governance and Disclosure 
Policies) to exempt issuers of certain investment companies, including 
Exchange Traded Funds (``ETFs''), from the requirement to obtain 
shareholder approval prior to the issuance of securities in connection 
with certain acquisitions of the stock or assets of an affiliated 
registered investment company. The proposed rule change was published 
for comment in the Federal Register on September 17, 2020.\3\ On 
October 30, 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 disapprove the proposed rule 
change.\5\ On December 1, 2020, the Exchange filed Amendment No. 1 to 
the proposed rule change, which superseded the proposed rule change as 
originally filed.\6\ On December 15, 2020, the Commission published 
notice of Amendment No. 1

[[Page 27488]]

and instituted proceedings under Section 19(b)(2)(B) of the Act \7\ to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendment No. 1.\8\ On March 12, 2021, the Commission 
extended the period for consideration of the proposed rule change to 
May 15, 2021.\9\ On March 25, 2021, the Exchange submitted Amendment 
No. 2 to the proposed rule change, which superseded the proposed rule 
change, as amended by Amendment No. 1.\10\ The Commission has received 
no comments on the proposed rule change. The Commission is publishing 
this notice to solicit comments on Amendment No. 2 from interested 
persons, and is approving the proposed rule change, as modified by 
Amendment No. 2, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89834 (September 11, 
2020), 85 FR 58090.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90297, 85 FR 70701 
(November 5, 2020). The Commission designated December 16, 2020, as 
the date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ Amendment No. 1 is available on the Commission's website at 
https://www.sec.gov/comments/sr-nysearca-2020-54/srnysearca202054.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 90675, 85 FR 83121 
(December 21, 2020).
    \9\ See Securities Exchange Act Release No. 91309, 86 FR 14778 
(March 18, 2021).
    \10\ In Amendment No. 2, the Exchange: (1) Revised the proposed 
rule text to state that the proposed exemption would apply in 
connection with the acquisition of the stock or assets of an 
affiliated registered investment company; (2) revised the proposed 
rule text to state that the proposed exemption would apply if the 
transaction does not otherwise require shareholder approval under 
the Investment Company Act of 1940 (``1940 Act'') and the rules 
thereunder; (3) added a statement that Rule 17a-8 under the 1940 Act 
does not relieve a fund of its obligation to obtain shareholder 
approval as may be required by state law or a fund's organizational 
documents; (4) clarified the description of Rule 17a-8 and its 
requirements throughout the discussion; (5) added an explanation for 
why the proposal would not present concerns regarding voting 
dilution; and (6) made other clarifications, corrections, and 
technical changes. Amendment No. 2 is available on the Commission's 
website at https://www.sec.gov/comments/sr-nysearca-2020-54/srnysearca202054.htm.
---------------------------------------------------------------------------

II. Description of the Proposal, as Modified by Amendment No. 2

    NYSE Arca Rule 5.3-E(d)(9) requires listed issuers to obtain 
shareholder approval in connection with the acquisition of the stock or 
assets of another company if: (i) 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) 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 investment 
companies registered under the 1940 Act,\11\ that are listed on the 
Exchange as Unit Investment Trusts, Investment Company Units, Exchange-
Traded Fund Shares, Portfolio Depositary Receipts, Managed Fund Shares, 
Active Proxy Portfolio Shares and Managed Portfolio Shares \12\ 
(collectively, ``1940 Act Securities''), from having to comply with the 
shareholder approval requirement in NYSE Arca Rule 5.3-E(d)(9) in 
connection with the acquisition of the stock or assets of an affiliated 
registered investment company in a transaction that complies with Rule 
17a-8 under the 1940 Act (Mergers of affiliated companies) (``Rule 17a-
8'') \13\ and does not otherwise require shareholder approval under the 
1940 Act or the rules thereunder or any other Exchange rule.\14\
---------------------------------------------------------------------------

    \11\ The Exchange states that approximately 88% of securities 
listed on the Exchange are issued by investment companies registered 
under the 1940 Act. See Amendment No. 2, supra note 10, at n.6.
    \12\ See NYSE Arca 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) for a description of, and listing 
requirements applicable to, each category of security proposed to be 
exempted.
    \13\ 17 CFR 270.17a-8.
    \14\ See proposed Rule 5.3-E.
---------------------------------------------------------------------------

    Sections 17(a)(1) and (2) of the 1940 Act prohibit, among other 
things, certain transactions between registered investment companies 
and affiliated persons.\15\ Rule 17a-8 provides an exemption from 
Sections 17(a)(1) and (2) of the 1940 Act for certain mergers of 
affiliated companies, provided, among other things, that the board of 
directors of each investment company, including a majority of the 
directors that are not interested persons of the respective investment 
company or of any other company or series participating in the 
transaction, must determine that (i) participation in the merger is in 
the best interests of its respective investment company, and (ii) the 
interests of the company's existing shareholders will not be diluted as 
a result of the transaction.\16\ In addition, under Rule 17a-8, an 
affiliated merger must be approved by a majority of the outstanding 
voting securities of the merging company that is not the surviving 
company unless certain conditions are met.\17\
---------------------------------------------------------------------------

    \15\ See 15 U.S.C. 80a-17(a)(1)-(2). See also the definition of 
``affiliated person'' in the 1940 Act, 15 U.S.C 80a-2(a)(3).
    \16\ See Amendment No. 2, supra note 10; 17 CFR 270.17a-8(a)(2).
    \17\ 17 CFR 270.17a-8(a)(3).
---------------------------------------------------------------------------

    Because the board of each merging company must make an affirmative 
decision that the transaction is in the best interest of its respective 
company and that the transaction will not result in dilution for 
existing shareholders, the Exchange states that it believes the 
provisions of Rule 17a-8 protect against dilution and 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.\18\ In addition, the Exchange explains that Rule 17a-8 
does not require the surviving company to obtain shareholder approval 
in connection with the merger of an affiliated company. The Exchange 
states that it therefore believes that it is appropriate to exempt 
issuers of 1940 Act Securities from having to comply with the 
shareholder approval requirement in NYSE Arca Rule 5.3-E(d)(9) in 
connection with the acquisition of the stock or assets of an affiliated 
registered investment company in a transaction that complies with Rule 
17a-8, which the Exchange states can be both time consuming and 
expensive.\19\
---------------------------------------------------------------------------

    \18\ See Amendment No. 2, supra note 10, at 6. With respect to 
voting dilution, the Exchange cited to a prior filing in which it 
stated that holders of derivative and special purpose securities 
either do not have the right to elect directors at annual meetings 
or have the right to elect directors only in very limited 
circumstances. See id. at n. 11 (citing Securities Exchange Act 
Release No. 83324 (May 24, 2018), 83 FR 25076 (May 31, 2018) (SR-
NYSEArca-2018-31)).
    \19\ See Amendment No. 2, supra note 10, at 5-6.
---------------------------------------------------------------------------

    Notwithstanding the proposed exemption, the Exchange states that 
other provisions of Exchange rules or the 1940 Act and the rules 
thereunder may require shareholder approval and will still apply.\20\ 
The Exchange also states that the adopting release for Rule 17a-8 
specifically noted that nothing in Rule 17a-8 relieves a fund of its 
obligation to obtain shareholder approval as may be required by state 
law or a fund's organizational documents.\21\
---------------------------------------------------------------------------

    \20\ See id. at 8.
    \21\ See id. at n. 5 (citing Investment Company Act Release No. 
25666, 67 FR 48511 (July 24, 2002) at n. 18).
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as

[[Page 27489]]

modified by Amendment No. 2, is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\22\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\23\ 
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, 
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 are not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposal to exempt issuers 
of 1940 Act Securities from the obligation to obtain shareholder 
approval pursuant to NYSE Arca Rule 5.3-E(d)(9) when they issue 
securities in connection with the acquisition of the stock or assets of 
an affiliated registered investment company in a transaction that 
complies with Rule 17a-8 is consistent with the Act. The corporate 
governance standards embodied in the listing standards of national 
securities exchanges, in particular, play an important role in ensuring 
that exchange-listed companies observe good governance practices, 
including safeguarding the interests of shareholders with respect to 
certain potentially dilutive transactions.\24\ The Commission believes 
the right of shareholders to vote in connection with the acquisition of 
the stock or assets of another company in circumstances that may give 
rise to dilution or where there may be conflicts of interests is an 
essential and important one.\25\ The Commission, however, believes 
that, because of the requirements set forth in Rule 17a-8, the 
requirement to obtain shareholder approval under the Exchange's rules 
may not be necessary for issuers of 1940 Act Securities in connection 
with a transaction that complies with Rule 17a-8 and does not otherwise 
require shareholder approval under the 1940 Act and the rules 
thereunder or any other Exchange rule.\26\
---------------------------------------------------------------------------

    \24\ See, e.g., Securities Exchange Act Release No. 48108 (June 
30, 2003), 68 FR 39995 (July 3, 2003) (approving equity compensation 
shareholder approval rules of both the NYSE and the National 
Association of Securities Dealers, Inc. n/k/a NASDAQ); Securities 
Exchange Act Release No. 76814 (December 31, 2015), 81 FR 820 
(January 7, 2016) (NYSE-2015-02) (approving amendments to the NYSE 
Listed Company Manual to exempt early stage companies from 
requirements to obtain shareholder approval in certain 
circumstances); Securities Exchange Act Release No. 84287 (September 
26, 2018) 83 FR 49599 (October 2, 2018) (NASDAQ-2018-008) (approving 
a Nasdaq proposal to change to the definition of market value for 
purposes of the shareholder approval rule and eliminate the 
requirement for shareholder approval of issuances at less than book 
value but greater than market value). See also Securities Exchange 
Act Release No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 
2008) (approving registration of BATS Exchange, Inc. noting that 
qualitative listing requirements including shareholder approval 
rules are designed to ensure that companies trading on a national 
securities exchange will adequately protect the interest of public 
shareholders).
    \25\ See, e.g., Securities Exchange Act Release Nos. 86406 (July 
18, 2019), 84 FR 35431, 35432 (July 23, 2019) (NYSE-2019-20); 57268 
(February 4, 2008), 84 FR 7614, 7616 (February 8, 2008) (AMEX-2006-
31).
    \26\ While Rule 17a-8 requires an affiliated merger to be 
approved by a majority of the outstanding voting securities of the 
merging company that is not the surviving company unless certain 
conditions are met, Rule 17a-8 does not include a requirement for a 
registered investment company that is the surviving company to 
obtain shareholder approval in connection with the merger of an 
affiliated company. See 17 CFR 270.17a-8(a)(3).
---------------------------------------------------------------------------

    Specifically, as discussed above, in the case of a merger of 
affiliated registered investment companies, Rule 17a-8 requires with 
respect to each registered investment company participating in the 
merger that the board of directors, including a majority of the 
directors who are not interested persons of the registered investment 
company or any other company or series participating in the merger, 
determines that (i) participation in the merger is in the best interest 
of the registered investment company, and (ii) the interests of the 
registered investment company's existing shareholders will not be 
diluted as a result of the merger.\27\ The Commission believes these 
requirements, including the requirement that a majority of directors 
who are not interested persons of the registered investment company or 
any other company or series participating in the merger make such 
determinations, should act as a safeguard for shareholders against 
dilution and conflicts of interest.\28\ As a result of the requirements 
of Rule 17a-8, the risk of 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 
registered investment company that complies with Rule 17a-8 is 
sufficiently mitigated. For the same reasons, the Commission believes 
that the requirements of Rule 17a-8 should help to ensure that 
conflicts of interests are carefully considered by the board of 
directors and a majority of the directors who are not interested 
persons that are required to approve the acquisition, including in 
cases where shareholder approval would normally be required under the 
Exchange's rules if such transaction involves a director, officer, or 
substantial shareholder of the listed company that has an interest in 
the company or assets to be acquired or the consideration to be 
paid.\29\
---------------------------------------------------------------------------

    \27\ 17 CFR 270.17a-8(a)(2).
    \28\ The Commission previously stated when approving amendments 
to Rule 17a-8 that ``[t]he rule will continue to require that each 
fund's board (including a majority of disinterested directors) 
determine that the merger is in the best interests of the fund and 
will not dilute the interests of shareholders. These are critical 
determinations boards must carefully consider, particularly when the 
merger involves significant conflicts of interest.'' See Investment 
Company Act Release No. 25666, July 18, 2002, 67 FR 48511 at 48513 
(July 24, 2002). The Commission also stated that directors must 
request and evaluate any information reasonably necessary to their 
determinations, and consider and give appropriate weight to all 
pertinent factors in making their findings under the rule, and in 
fulfilling the overall duty of care. Id. See also Rule 17a-
8(a)(2)(ii).
    \29\ The Commission notes that it also previously approved an 
NYSE rule proposal that exempted registered investment companies 
under the 1940 Act from a broker vote prohibition for election of 
directors. In approving the proposal the Commission concluded that 
the different regulatory regime for registered investment companies 
supports the exemption. See Securities Exchange Act Release No. 
60215 (July 1, 2009), 74 FR 33293 (July 10, 2009) (SR-NYSE-2006-92), 
at 33303.
---------------------------------------------------------------------------

    The proposed exemption from the shareholder approval requirements 
in NYSE Arca Rule 5.3-E(d)(9) is limited in scope. In particular, the 
proposed exemption from NYSE Arca Rule 5.3-E(d)(9) is limited to 
issuers of 1940 Act Securities only in connection with the acquisition 
of the stock or assets of an affiliated registered investment company 
if such transaction complies with Rule 17a-8. Furthermore, 
notwithstanding the proposed exemption from the shareholder approval 
requirement in NYSE Arca Rule 5.3-E(d)(9), other provisions of the 
Exchange rules, or the 1940 Act and the rules thereunder will still 
apply and may require shareholder approval.\30\ Further, the adopting 
release for Rule 17a-8 specifically stated that nothing in Rule 17a-8 
relieves a fund of its obligation to obtain shareholder approval as may 
be required by state law or a fund's organizational documents.\31\ 
Thus, an issuer of a 1940

[[Page 27490]]

Act Security may still be required to obtain shareholder approval in 
connection with the acquisition of the stock or assets of an affiliated 
company even if such transaction complies with Rule 17a-8 if such 
transaction would require shareholder approval under other applicable 
Exchange rules, another provision of the 1940 Act or the rules and 
regulations thereunder, state law, or a fund's organizational 
documents.
---------------------------------------------------------------------------

    \30\ See NYSEArca Rule 5.3-E(d), which sets forth the Exchange's 
shareholder approval requirements, including, among others, for 
issuances involving a change of control and equity compensation. If 
shareholder approval is not required under one provision of the 
Exchange's rule, it may still be required under another provision of 
the rule.
    \31\ See supra note 21.
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendment No. 2 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 2 to 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.

    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 June 10, 2021.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendment No. 2

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 2, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
2 in the Federal Register. In Amendment No. 2, the Exchange: (1) 
Revised the proposed rule text to state that the proposed exemption 
would apply in connection with the acquisition of the stock or assets 
of an affiliated registered investment company; (2) revised the 
proposed rule text to state that the proposed exemption would apply if 
the transaction does not otherwise require shareholder approval under 
the 1940 Act and the rules thereunder; (3) added a statement that Rule 
17a-8 does not relieve a fund of its obligation to obtain shareholder 
approval as may be required by state law or a fund's organizational 
documents; (4) clarified the description of Rule 17a-8 and its 
requirements throughout the discussion; (5) added an explanation for 
why the proposal would not present concerns regarding voting dilution; 
and (6) made other clarifications, corrections, and technical 
changes.\32\ Amendment No. 2 provided greater clarity to the proposal. 
The changes and additional clarifying information in Amendment No. 2 
strengthen the proposal and assist the Commission in evaluating the 
Exchange's proposal and in determining that it is consistent with the 
Act. Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\33\ to approve the proposed rule change, as 
modified by Amendment No. 2, on an accelerated basis.
---------------------------------------------------------------------------

    \32\ See supra note 10.
    \33\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-NYSEArca-2020-54), as 
modified by Amendment No. 2, be, and it hereby is, approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10606 Filed 5-19-21; 8:45 am]
BILLING CODE 8011-01-P