Notice2021-22437
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Granting Approval of a Proposed Rule Change To Amend Nasdaq Rule 5750 (Proxy Portfolio Shares) To Provide for the Use of Custom Baskets Consistent With the Exemptive Relief Issued Pursuant to the Investment Company Act of 1940 Applicable to a Series of Proxy Portfolio Shares
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 14, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 196 (Thursday, October 14, 2021)</title>
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[Federal Register Volume 86, Number 196 (Thursday, October 14, 2021)]
[Notices]
[Pages 57227-57229]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-22437]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93277; File No. SR-NASDAQ-2021-065]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Granting Approval of a Proposed Rule Change To Amend Nasdaq Rule 5750
(Proxy Portfolio Shares) To Provide for the Use of Custom Baskets
Consistent With the Exemptive Relief Issued Pursuant to the Investment
Company Act of 1940 Applicable to a Series of Proxy Portfolio Shares
October 8, 2021.
I. Introduction
On August 25, 2021, The Nasdaq Stock Market LLC (``Exchange'' or
``Nasdaq'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Nasdaq Rule 5750 (Proxy
Portfolio Shares) to provide for the use of custom baskets consistent
with the exemptive relief issued pursuant to the Investment Company Act
of 1940 (``1940 Act'') \3\ applicable to a series of Proxy Portfolio
Shares. The proposed rule change was published for comment in the
Federal Register on September 2, 2021.\4\ The Commission has received
no comments on the proposed rule change. The Commission is approving
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 80a.
\4\ See Securities Exchange Act Release No. 92790 (August 27,
2021), 86 FR 49357.
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[[Page 57228]]
II. Description
The Exchange proposes to amend Nasdaq Rule 5750, which permits the
listing and trading of series of Proxy Portfolio Shares. Nasdaq Rule
5750 currently requires that Proxy Portfolio Shares be issued and
redeemed in a specified aggregate minimum number in return for the
Proxy Basket \5\ and/or cash.\6\ The Exchange proposes to amend the
definition of ``Proxy Portfolio Share'' in Nasdaq Rule 5750(c)(1) to
permit creations and redemptions of shares in return for a Custom
Basket in addition to the Proxy Basket, to the extent permitted by a
fund's exemptive relief.\7\ Further, the Exchange proposes to define
the term ``Custom Basket'' as a portfolio of securities that is
different from the Proxy Basket and is otherwise consistent with the
exemptive relief issued pursuant to the 1940 Act applicable to a series
of Proxy Portfolio Shares.\8\ The Exchange also proposes to amend the
definition of ``Reporting Authority'' in Nasdaq Rule 5750(c)(3) to
include Custom Baskets among the types of information for which the
Reporting Authority designated for a particular series of Proxy
Portfolio Shares will be the official source for calculating and
reporting such information.\9\
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\5\ The term ``Proxy Basket'' means the identities and
quantities of the securities and other assets included in a basket
that is designed to closely track the daily performance of the Fund
Portfolio, as provided in the exemptive relief under the 1940 Act
applicable to a series of Proxy Portfolio Shares. See Nasdaq Rule
5750(c)(5). The term ``Fund Portfolio'' means the identities and
quantities of the securities and other assets held by the investment
company registered under the 1940 Act (``Investment Company'') that
will form the basis for the Investment Company's calculation of net
asset value (``NAV'') at the end of the business day. See Nasdaq
Rule 5750(c)(2).
\6\ See Nasdaq Rule 5750(c)(1) (defining the term ``Proxy
Portfolio Share'').
\7\ See proposed Nasdaq Rule 5750(c)(1) (defining ``Proxy
Portfolio Share'' as a security that: (A) Represents an interest in
an Investment Company organized as an open-end management investment
company, that invests in a portfolio of securities selected by the
Investment Company's investment adviser consistent with the
Investment Company's investment objectives and policies; (B) is
issued in a specified aggregate minimum number in return for a
deposit of a specified Proxy Basket or Custom Basket, as applicable,
and/or a cash amount with a value equal to the next determined NAV;
(C) when aggregated in the same specified minimum number, may be
redeemed at a holder's request, which holder will be paid a
specified Proxy Basket or Custom Basket, as applicable, and/or a
cash amount with a value equal to the next determined NAV; and (D)
the portfolio holdings for which are disclosed within at least 60
days following the end of every fiscal quarter).
\8\ See proposed Nasdaq Rule 5750(c)(6).
\9\ See proposed Nasdaq Rule 5750(c)(3) (defining ``Reporting
Authority'' in respect of a particular series of Proxy Portfolio
Shares as the Exchange, an institution, or a reporting service
designated by the Exchange or by the exchange that lists a
particular series of Proxy Portfolio Shares (if the Exchange is
trading such series pursuant to unlisted trading privileges) as the
official source for calculating and reporting information relating
to such series, including, but not limited to, the Proxy Basket; the
Fund Portfolio; the Custom Basket; the amount of any cash
distribution to holders of Proxy Portfolio Shares, NAV, or other
information relating to the issuance, redemption or trading of Proxy
Portfolio Shares).
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The Exchange proposes to amend Nasdaq Rule 5750(d) to incorporate
specific initial and continued listing criteria relating to Custom
Baskets. Specifically, the Exchange proposes to add a new initial
listing requirement to stipulate that the Exchange will obtain a
representation from the issuer of each series of Proxy Portfolio Shares
that the issuer and any person acting on behalf of the series of Proxy
Portfolio Shares will comply with Regulation Fair Disclosure under the
Exchange Act (``Regulation FD''),\10\ including with respect to any
Custom Basket.\11\ The Exchange also proposes to add a new continued
listing requirement that, with respect to each Custom Basket utilized
by a series of Proxy Portfolio Shares, each business day, before the
opening of trading in the regular market session,\12\ the Investment
Company shall make publicly available on its website the composition of
any Custom Basket transacted on the previous business day, except a
Custom Basket that differs from the applicable Proxy Basket only with
respect to cash.\13\
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\10\ 17 CFR 243.100.
\11\ See proposed Nasdaq Rule 5750(d)(1)(B)(iii). Nasdaq Rule
5750(d)(1)(B) currently provides that the Exchange will obtain a
representation from the issuer of each series of Proxy Portfolio
Shares that the NAV per share for the series will be calculated
daily and that the NAV, the Proxy Basket, and the Fund Portfolio
will be made available to all market participants at the same time
when disclosed. The current requirements would be designated as
Nasdaq Rule 5750(d)(1)(B)(i) and (ii).
\12\ ``Regular market session'' means the trading session from
9:30 a.m. until 4:00 p.m. or 4:15 p.m. See Nasdaq Rule
4120(b)(4)(D).
\13\ See proposed Nasdaq Rule 5750(d)(2)(A)(ii). Nasdaq Rule
5750(d)(2)(A) currently provides that the Proxy Basket will be
publicly disseminated at least once daily and will be made available
to all market participants at the same time. This current
requirement would be designated as Nasdaq Rule 5750(d)(2)(A)(i). The
Exchange also proposes to amend the title of Nasdaq Rule
5750(d)(2)(A) to ``Proxy Basket and Custom Basket.'' See proposed
Nasdaq Rule 5750(d)(2)(A).
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Finally, the Exchange proposes to amend Nasdaq Rules 5750(b)(5) and
(6), which contain requirements that specified parties must erect and
maintain ``fire walls'' with respect to access to information
concerning the Fund Portfolio and Proxy Basket and enact procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the Fund Portfolio and Proxy Basket, so that
these requirements would also cover information concerning Custom
Baskets. As proposed to be amended, Nasdaq Rule 5750(b)(5) would
require that, if the investment adviser to the Investment Company
issuing Proxy Portfolio Shares is registered as a broker-dealer or is
affiliated with a broker-dealer, such investment adviser will erect and
maintain a ``fire wall'' between the investment adviser and personnel
of the broker-dealer or broker-dealer affiliate, as applicable, with
respect to access to information concerning the composition of and/or
changes to the Fund Portfolio, the Proxy Basket, and/or the Custom
Basket, as applicable. In addition, any person related to the
investment adviser or Investment Company who makes decisions pertaining
to the Investment Company's Fund Portfolio, the Proxy Basket, and/or
the Custom Basket or has access to nonpublic information regarding the
Fund Portfolio, the Proxy Basket, and/or the Custom Basket, as
applicable, or changes thereto, must be subject to procedures designed
to prevent the use and dissemination of material nonpublic information
regarding the Fund Portfolio, and/or the Proxy Basket, and/or the
Custom Basket, as applicable, or changes thereto. Proposed Nasdaq Rule
5750(b)(6) would require that any person or entity, including a
custodian, Reporting Authority, distributor, or administrator, who has
access to nonpublic information regarding the Fund Portfolio, the Proxy
Basket, or the Custom Basket, as applicable, or changes thereto, must
be subject to procedures designed to prevent the use and dissemination
of material nonpublic information regarding the applicable Fund
Portfolio, the Proxy Basket, or the Custom Basket, as applicable, or
changes thereto. Moreover, if any such person or entity is registered
as a broker-dealer or affiliated with a broker-dealer, such person or
entity will erect and maintain a ``fire wall'' between the person or
entity and the broker-dealer with respect to access to information
concerning the composition and/or changes to such Fund Portfolio, Proxy
Basket, or Custom Basket, as applicable.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the Exchange Act and rules and regulations
thereunder applicable to a national securities exchange.\14\ In
particular, the
[[Page 57229]]
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Exchange Act,\15\ 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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\14\ 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).
\15\ 15 U.S.C. 78f(b)(5).
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The Exchange previously filed a proposed rule change to adopt
Nasdaq Rule 5750 to permit the listing and trading of Proxy Portfolio
Shares.\16\ As discussed above, under the current rule, a series of
Proxy Portfolio Shares must create or redeem shares in return for the
Proxy Basket and/or cash. The Exchange is now proposing to amend Nasdaq
Rule 5750 to allow a series of Proxy Portfolio Shares to create or
redeem shares in return for a Custom Basket, which is a portfolio of
securities that is different from the Proxy Basket, to the extent
consistent with an issuer's exemptive relief under the 1940 Act.\17\
For the reasons discussed below, the Commission finds that the proposed
amendments to Nasdaq Rule 5750 to provide for the use of Custom Baskets
for Proxy Portfolio Shares, to the extent permitted by an issuer's
exemptive relief under the 1940 Act, are consistent with Section
6(b)(5) of the Exchange Act.
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\16\ See Securities Exchange Act Release No. 89110 (June 22,
2020), 85 FR 38461 (June 26, 2020) (SR-NASDAQ-2020-032) (Notice of
Filing and Immediate Effectiveness to Adopt Nasdaq Rule 5750 to List
and Trade Proxy Portfolio Shares) (``2020 Notice''). At the time,
the Exchange stated that the proposed rule change to adopt new
Nasdaq Rule 5750 was substantially similar to a proposed rule change
by Cboe BZX Exchange, Inc. (``BZX'') to adopt BZX Rule 14.11(m) that
the Commission had recently approved. See id. at 38461 (citing
Securities Exchange Act Release No. 88887 (May 15, 2020), 85 FR
30990 (May 21, 2020) (SR-CboeBZX-2019-107) (``2020 Order'')). The
Exchange must file a separate proposed rule change pursuant to
Section 19(b) of the Exchange Act for each series of Proxy Portfolio
Shares. See Nasdaq Rule 5750(b)(1).
\17\ In the 2020 Notice, the Exchange identified several
applications for exemptive relief and subsequent orders granting
certain exemptive relief under the 1940 Act and stated that it
believed that each associated series of shares would qualify as
Proxy Portfolio Shares under proposed Nasdaq Rule 5750. See 2020
Notice, supra note 16, 85 FR at 38461 n.3. The Commission has since
granted exemptive relief under the 1940 Act to certain series of
shares that the Exchange had identified as qualifying as Proxy
Portfolio Shares to permit the creation or redemption of shares
using a Custom Basket that includes instruments that are not
included, or included with different weightings, in the fund's
equivalent to a Proxy Basket. See, e.g., Fidelity Beach Street
Trust, et al., Investment Company Act Release No. 34350 (August 5,
2021).
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The Commission believes that the proposed changes to Nasdaq Rules
5750(b)(5) and (6) are consistent with the Exchange Act and are
reasonably designed to help prevent fraudulent and manipulative acts
and practices. The Commission notes that, because Proxy Portfolio
Shares do not publicly disclose on a daily basis information about the
holdings of the Fund Portfolio, it is vital that key information
relating to Proxy Portfolio Shares, including information relating to
Custom Baskets, be kept confidential prior to its public disclosure and
not be subject to misuse.\18\ Accordingly, the Commission believes that
the Exchange's proposal to amend Nasdaq Rules 5750(b)(5) and (6) \19\
to apply the current ``fire wall'' and other requirements contained
therein to those that have access to information concerning, or make
decisions pertaining to, the composition of and/or changes to the
Custom Baskets, in addition to the existing requirements relating to
the Fund Portfolio and the Proxy Basket, is designed to prevent fraud
and manipulation with respect to Proxy Portfolio Shares.
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\18\ See 2020 Order, supra note 16, 85 FR at 31002-03.
\19\ See supra Section II, describing proposed Nasdaq Rules
5750(b)(5) and (6).
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The Commission also believes that the proposed amendments to the
initial and continued listing requirements for Proxy Portfolio Shares
are adequate to ensure transparency of information relating to Custom
Baskets utilized by a fund and to ensure that such information is
available to the rest of the market participants at the same time.
Specifically, prior to the opening of trading on each business day, the
Investment Company will make publicly available on its website the
composition of any Custom Basket transacted on the previous business
day, except a Custom Basket that differs from the applicable Proxy
Basket only with respect to cash.\20\ In addition, prior to the initial
listing of the Proxy Portfolio Shares, the Exchange will be required to
obtain a representation from the issuer of each series of Proxy
Portfolio Shares that the issuer and any person acting on behalf of the
series of Proxy Portfolio Shares will comply with Regulation FD,
including with respect to any Custom Basket.\21\ These measures help to
mitigate concerns that certain information regarding the funds will be
available only to select market participants and thereby helps to
prevent fraud and manipulation.
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\20\ See proposed Nasdaq Rule 5750(d)(2)(A)(ii).
\21\ See proposed Nasdaq Rule 5750(d)(1)(B)(iii). The Commission
notes that a fund's use of, or conversations with authorized
participants about, Creation Baskets that would result in selective
disclosure of nonpublic information would effectively be limited by
the fund's obligation to comply with Regulation FD. See, e.g.,
Fidelity Beach Street Trust, et al., Investment Company Act Release
No. 34326 (July 9, 2021).
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The Commission notes that, as set forth in the definition of
``Custom Basket,'' a series of Proxy Portfolio Shares may only utilize
Custom Baskets to the extent consistent with the exemptive relief
issued pursuant to the 1940 Act applicable to such series.\22\ The
Commission further notes that all series of Proxy Portfolio Shares will
continue to be subject to the existing rules and procedures that govern
the listing and trading of Proxy Portfolio Shares and the trading of
equity securities on the Exchange.
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\22\ See proposed Nasdaq Rule 5750(c)(6).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act \23\ that the proposed rule change (SR-NASDAQ-2021-065),
be, and it hereby is, approved.
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\23\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-22437 Filed 10-13-21; 8:45 am]
BILLING CODE 8011-01-P
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