Document ID: SEC-2018-1714-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2018-11-07T05:00Z

[Federal Register Volume 83, Number 216 (Wednesday, November 7, 2018)]
[Notices]
[Pages 55773-55776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24305]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84517; File No. SR-NYSEArca-2018-54]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Amend Commentary .01 to NYSE Arca Rule 8.600-E Relating 
to Certain Generic Listing Standards for Managed Fund Shares

November 1, 2018.

I. Introduction

    On July 18, 2018, 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 certain generic listing standards for Managed Fund Shares. The 
proposed rule change was published for comment in the Federal Register 
on August 7, 2018.\3\ On September 19, 2018, 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 proposed rule change. This order 
institutes 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. 83759 (August 1, 
2018), 83 FR 38753 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 84195, 83 FR 48474 
(September 25, 2018). The Commission designated November 5, 2018 as 
the date by which the Commission shall approve the proposed rule 
change, disapprove the proposed rule change, 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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II. Description of the Proposed Rule Change \7\
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    \7\ For a full description of the proposed rule change, see 
Notice, supra note 3.
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    Commentary .01 to NYSE Arca Rule 8.600-E sets forth the generic 
listing standards for Managed Fund Shares. The Exchange proposes to 
amend Commentaries .01(a) and (b) to NYSE Arca Rule 8.600-E as 
described below.

A. Proposed Amendments to Commentary .01(a) to NYSE Arca Rule 8.600-E

    Commentary .01(a) to NYSE Arca Rule 8.600-E sets forth the generic 
listing standards applicable to equity securities \8\ in the portfolio 
of a series of Managed Fund Shares.
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    \8\ Commentary .01(a) to NYSE Arca Rule 8.600-E provides that 
equity securities include the following: U.S. Component Stocks (as 
described in NYSE Arca Rule 5.2-E(j)(3)); Non-U.S. Component Stocks 
(as described in NYSE Arca Rule 5.2-E(j)(3)); Derivative Securities 
Products (i.e., Investment Company Units and securities described in 
Section 2 of NYSE Arca Rule 8-E); and Index-Linked Securities that 
qualify for Exchange listing and trading under NYSE Arca Rule 5.2-
E(j)(6).
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1. Proposed Amendments to Commentary .01(a)(2) to NYSE Arca Rule 8.600-
E
    Commentary .01(a)(2) to NYSE Arca Rule 8.600-E sets forth the 
generic listing standards applicable to Non-U.S. Component Stocks \9\ 
in the portfolio of

[[Page 55774]]

a series of Managed Fund Shares. Commentary .01(a)(2)(A) currently 
provides that Non-U.S. Component Stocks each shall have a minimum 
market value of at least $100 million. The Exchange proposes to amend 
Commentary .01(a)(2)(A) to provide that Non-U.S. Component Stocks 
``that in the aggregate account for at least 90% of the weight of the 
Non-U.S. Component Stocks of the equity portion of a portfolio'' each 
shall have a minimum market value of at least $100 million. Commentary 
.01(a)(2)(B) currently provides that Non-U.S. Component Stocks each 
shall have a minimum global monthly trading volume of 250,000 shares, 
or minimum global notional volume traded per month of $25,000,000, 
averaged over the last six months. The Exchange proposes to amend 
Commentary .01(a)(2)(B) to provide that Non-U.S. Component Stocks 
``that in the aggregate account for at least 70% of the weight of the 
Non-U.S. Component Stocks of the equity portion of a portfolio'' each 
shall have a minimum global monthly trading volume of 250,000 shares, 
or minimum global notional volume traded per month of $25,000,000, 
averaged over the last six months.
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    \9\ NYSE Arca Rule 5.2-E(j)(3) defines Non-U.S. Component Stock 
to mean an equity security that is not registered under Sections 
12(b) or 12(g) of the Act and that is issued by an entity that (a) 
is not organized, domiciled or incorporated in the United States, 
and (b) is an operating company (including Real Estate Investment 
Trusts and income trusts, but excluding investment trusts, unit 
trusts, mutual funds, and derivatives).
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2. Proposed New Commentary .01(a)(3) to NYSE Arca Rule 8.600-E
    The Exchange proposes to add new Commentary .01(a)(3) to NYSE Arca 
Rule 8.600-E, which would provide that the portfolio of a series of 
Managed Fund Shares may include non-exchange-traded open-end management 
investment company securities,\10\ and such securities would be 
excluded from the equity portion of the portfolio for purposes of 
meeting the criteria in Commentary .01(a)(1).
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    \10\ For purposes of proposed Commentary .01(a)(3), non-
exchange-traded open-end management investment company securities 
would not include money market funds, which the Exchange states are 
cash equivalents under Commentary .01(c) to NYSE Arca Rule 8.600-E 
and for which there is no limitation in the percentage of the 
portfolio invested in such securities. See Notice, supra note 3, at 
38754.
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B. Proposed Amendment to Commentary .01(b)(5) to NYSE Arca Rule 8.600-E

    Commentary .01(b) to NYSE Arca Rule 8.600-E sets forth the generic 
listing standards applicable to fixed income securities \11\ in the 
portfolio of a series of Managed Fund Shares. Commentary .01(b)(5) 
currently provides that non-agency, non-GSE and privately-issued 
mortgage-related and other asset-backed securities components of a 
portfolio shall not account, in the aggregate, for more than 20% of the 
weight of the fixed income portion of the portfolio. The Exchange 
proposes to amend Commentary .01(b)(5) by deleting the reference to the 
``fixed income portion'' of the portfolio, such that non-agency, non-
GSE and privately-issued mortgage-related and other asset-backed 
securities components of a portfolio could not account, in the 
aggregate, for more than 20% of the weight of the whole portfolio.
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    \11\ Commentary .01(b) to NYSE Arca Rule 8.600-E provides that 
fixed income securities are debt securities that are notes, bonds, 
debentures or evidence of indebtedness that include, but are not 
limited to, U.S. Department of Treasury securities, government-
sponsored entity (``GSE'') securities, municipal securities, trust 
preferred securities, supranational debt and debt of a foreign 
country or a subdivision thereof, investment grade and high yield 
corporate debt, bank loans, mortgage and asset backed securities, 
and commercial paper.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2018-54 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \12\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposal. 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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    \12\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\13\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposal's consistency with Section 6(b)(5) of the 
Act,\14\ 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.
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    \13\ Id.
    \14\ 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,\15\ in addition to any other comments they may wish to 
submit about the proposal. In particular, the Commission seeks comment 
regarding whether the proposal would result in the listing and trading 
of Managed Fund Shares that are susceptible to manipulation.
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    \15\ See supra note 3.
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    As discussed above, the Exchange proposes to amend Commentary 
.01(a)(2)(A) to NYSE Arca Rule 8.600-E to apply the minimum market 
value requirement to 90% (rather than 100%) of the weight of the Non-
U.S. Component Stocks of the equity portion of the portfolio. The 
Exchange also proposes to amend Commentary .01(a)(2)(B) to apply the 
trading volume (shares and notional volume) requirement to 70% (rather 
than 100%) of the weight of the Non-U.S. Component Stocks of the equity 
portion of the portfolio.\16\ The Exchange states that these amended 
provisions would be comparable to the current numerical requirements in 
Commentaries .01(a)(B)(1) and (2) to NYSE Arca Rule 5.2-E(j)(3), which 
apply to component stocks of an index or portfolio underlying a series 
of Investment Company Units.\17\ The Exchange also states that, like 
the requirements applicable to Investment Company Units, a substantial 
portion of the Non-U.S. Component Stocks in the Managed Fund Shares 
portfolio would be subject to the minimum liquidity and market value 
requirements.\18\ The Exchange additionally states that Non-U.S. 
Component Stocks would continue to be subject to the weighting and 
diversification requirements under Commentaries .01(a)(2)(C) and (D) to 
NYSE Arca Rule 8.600-E.\19\
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    \16\ According to the Exchange, these proposals would provide 
additional flexibility to Managed Fund Shares investing in Non-U.S. 
Component Stocks. See Notice, supra note 3, at 38754.
    \17\ See id. at 38753.
    \18\ See id. at 38753-54.
    \19\ See id. at 38754. Commentary .01(a)(2)(C) requires that the 
most heavily weighted Non-U.S. Component stock not exceed 25% of the 
equity weight of the portfolio and, to the extent applicable, the 
five most heavily weighted Non-U.S. Component Stocks not exceed 60% 
of the equity weight of the portfolio. Commentary .01(a)(2)(D) 
requires that, where the equity portion of the portfolio includes 
Non-U.S. Component Stocks, the equity portion of the portfolio 
include a minimum of 20 component stocks; provided, however, that 
there shall be no minimum number of component stocks if (i) one or 
more series of Derivative Securities Products or Index-Linked 
Securities constitute, at least in part, components underlying a 
series of Managed Fund Shares, or (ii) one or more series of 
Derivative Securities Products or Index-Linked Securities account 
for 100% of the equity weight of the portfolio of a series of 
Managed Fund Shares.
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    The Commission seeks comment regarding the sufficiency of the 
Exchange's statements in support of these aspects of the proposal. The

[[Page 55775]]

Commission also notes that while the proposed numerical percentage 
thresholds (i.e., 90% and 70%) would be the same as those in 
Commentaries .01(a)(B)(1) and (2) to NYSE Arca Rule 5.2-E(j)(3), the 
proposed numerical percentage thresholds would be applied differently 
from those in Commentaries .01(a)(B)(1) and (2) to NYSE Arca Rule 5.2-
E(j)(3). Specifically, the proposal would measure the Non-U.S. 
Component Stocks that meet the specified quantitative listing standards 
as a percentage of the Non-U.S. Component Stocks portion of the 
portfolio. However, Commentaries .01(a)(B)(1) and (2) to NYSE Arca Rule 
5.2-E(j)(3) measure the component stocks that meet the specified 
quantitative listing standards as a percentage of the U.S. and Non-U.S. 
Component Stocks portions of the index or portfolio.\20\
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    \20\ Derivative Securities Products are excluded from 
Commentaries .01(a)(B)(1) and (2) to NYSE Arca Rule 5.2-E(j)(3).
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    As discussed above, the Exchange proposes to add new Commentary 
.01(a)(3) to NYSE Arca Rule 8.600-E to permit Managed Fund Shares to 
hold non-exchange-traded open-end management investment company 
securities, and to exclude these securities from the equity portion of 
the portfolio for purposes of meeting the criteria in Commentary 
.01(a)(1).\21\ The Exchange argues that, because these securities must 
satisfy the applicable Investment Company Act of 1940 (``1940 Act'') 
diversification requirements, and have a net asset value based on the 
value of securities and financial instruments the investment company 
holds, it is both unnecessary and inappropriate to apply to such 
investment company securities the criteria in Commentary .01(a)(1).\22\ 
The Exchange also asserts that it would be difficult or impossible to 
apply to mutual fund shares certain of the generic quantitative 
criteria in Commentaries .01(a)(1)(A) through (D).\23\ Moreover, the 
Exchange states that Commentaries .01(a)(1)(A) through (D) exclude 
certain ``Derivative Securities Products'' that are exchange-traded 
investment company securities.\24\
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    \21\ According to the Exchange, these securities may be 
utilized, for example, to obtain income on short-term cash balances 
while awaiting attractive investment opportunities, to provide 
liquidity in preparation for anticipated redemptions, or for 
defensive purposes. See Notice, supra note 3, at 38754. The Exchange 
states that these securities may include mutual funds that invest 
principally in securities and financial instruments that help the 
fund meet its investment objective or equitize cash in the short 
term. See id.
    \22\ See id. The Exchange also notes that the Commission has 
previously approved the listing and trading of series of Managed 
Fund Shares that may invest in non-exchange-traded investment 
company securities to the extent permitted by Section 12(d)(1) of 
the 1940 Act and the rules thereunder. See id.
    \23\ See id. at 38755. The Exchange states that, for example, 
the requirements in Commentary .01(a)(1)(B) that there be minimum 
monthly trading volume of 250,000 shares, or minimum notional volume 
traded per month of $25,000,000, averaged over the last six months, 
are tailored to exchange-traded securities and not to mutual fund 
shares, which do not trade in the secondary market and for which no 
such volume information is reported. See id. The Exchange also 
states that it would not be appropriate to apply Commentaries 
.01(a)(1)(A), (C), and (D) to open-end management investment company 
securities, and that open-end investment companies hold multiple 
individual securities as disclosed publicly in accordance with the 
1940 Act. See id.
    \24\ The Exchange states that ``Derivative Securities Products'' 
includes Investment Company Units, Portfolio Depositary Receipts, 
and Managed Fund Shares. See id. at 38754.
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    The Commission seeks comment regarding the sufficiency of the 
Exchange's statements in support of this aspect of the proposal. The 
Commission notes that, as proposed, the portfolios of generically-
listed Managed Fund Shares could be composed of non-exchange-traded 
open-end managed investment company securities that do not meet the 
listing standards under Commentary .01(a)(1).\25\ In addition, as 
proposed, non-exchange-traded open-end management investment company 
securities would not include money market funds, which the Exchange 
states are cash equivalents under Commentary .01(c) to NYSE Arca Rule 
8.600-E. However, the Commission notes that ``cash equivalents'' is 
defined under Commentary .01(c) to include short-term instruments 
``with maturities of less than 3 months.'' Moreover, while there are 
currently exceptions for Derivative Securities Products under 
Commentaries .01(a)(1)(A) through (D), unlike non-exchange-traded open-
end management investment company securities, Derivative Securities 
Products are listed on U.S. national securities exchanges.\26\
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    \25\ These include, for example, requirements for minimum market 
value, minimum monthly trading volume, minimum notional volume 
traded per month, and diversification.
    \26\ See Commentary .01(a) to NYSE Arca Rule 8.600-E (defining 
Derivative Securities Products to mean Investment Company Units and 
securities described in Section 2 of NYSE Arca Rule 8-E).
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    Finally, as discussed above, the Exchange proposes to amend 
Commentary .01(b)(5) to NYSE Arca Rule 8.600-E to permit portfolios of 
Managed Fund Shares to potentially hold more non-agency, non-GSE and 
privately-issued mortgage-related and other asset-backed securities 
(i.e., no more than 20% of the weight of the whole portfolio) than is 
currently permitted (i.e., no more than 20% of the weight of the fixed 
income portion of the portfolio).\27\ The Exchange states that such 
investments would be subject to the liquidity procedures adopted by a 
fund's board of directors.\28\ The Commission seeks comment regarding 
the sufficiency of the Exchange's statements in support to this aspect 
of the proposal.
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    \27\ The Exchange states that these investments could provide a 
fund with increased diversification because they may be less 
correlated to interest rates than many other fixed income 
securities. See Notice, supra note 3, at 38754.
    \28\ See id. The Exchange also states that the Commission has 
previously approved the listing of actively managed exchange-traded 
funds that can invest 20% of their total assets in non-U.S. 
Government, non-agency, non-GSE and other privately issued asset-
backed and mortgage-backed securities. See id.
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IV. 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 proposed rule change 
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 under the Act,\29\ any 
request for an opportunity to make an oral presentation.\30\
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    \29\ 17 CFR 240.19b-4.
    \30\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts 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 Acts 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 November 28, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 12, 2018.
    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

[[Page 55776]]

     Send an email to [email protected]. Please include 
File Number SR-NYSEArca-2018-54 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-2018-54. 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-2018-54 and should be submitted 
by November 28, 2018. Rebuttal comments should be submitted by December 
12, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-24305 Filed 11-6-18; 8:45 am]
 BILLING CODE 8011-01-P