Notice2022-09519
Self-Regulatory Organizations; New York Stock Exchange LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend Rules 5P, 5.2(j)(8)(e), 8P, and 98
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
May 4, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 86 (Wednesday, May 4, 2022)</title>
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[Federal Register Volume 87, Number 86 (Wednesday, May 4, 2022)]
[Notices]
[Pages 26378-26380]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-09519]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94814; File No. SR-NYSE-2022-04]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Amend Rules 5P, 5.2(j)(8)(e), 8P, and 98
April 28, 2022.
On January 14, 2022, New York Stock Exchange LLC (``Exchange'' or
``NYSE'') 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 permit the listing and trading of certain
exchange-traded products (``ETPs'') that overlie one or more NMS Stocks
listed on the Exchange. The proposed rule change was published for
comment in the Federal Register on January 31, 2022.\3\ On March 9,
2022, 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\ The
Commission has received no comment letters on the proposal. This order
institutes proceedings under 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. 94053 (Jan. 25,
2022), 87 FR 4982 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 94392, 87 FR 14592
(Mar. 15, 2022). The Commission designated May 1, 2022 as the date
by which it should approve or disapprove, or institute proceedings
to determine whether to disapprove, the proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary Description of the Proposal \7\
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\7\ For a complete description of the proposed rule change, see
Notice, supra note 3.
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The Exchange proposes to amend its rules regarding side-by-side
trading, which is the trading of an equity
[[Page 26379]]
security and its related derivative product at the same physical
location. Specifically, the Exchange proposes to exclude from its
listing prohibitions in NYSE Rules 5P and 8P \8\ shares of an ETP that
independently satisfies the quantitative generic listing criteria set
forth in NYSE Rules 5.2(j)(3), Supplementary Material .01(a), NYSE Rule
5.2(j)(6)(B)(I); or proposed Rule 5.2(j)(8)(e)(1)(B), as well as shares
of an ETP that independently satisfies the generic listing criteria set
forth in NYSE Rules 8.100, Supplementary Material .01(a)(A) or 8.600,
Supplementary Material .01(a).\9\
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\8\ NYSE Rules 5P and 8P generally prohibit the Exchange from
listing shares of an ETP that ``has any component NMS Stock that is
listed on the Exchange or that is based on, or represents an
interest in, an underlying index or reference asset that includes an
NMS Stock listed on the Exchange. NMS Stock is defined in Rule 600
of Regulation NMS, 17 CFR 242.600(b)(48) as ``any NMS security other
than an option.'' ``NMS Security'' means any security or class of
securities for which transaction reports are collected, processed,
and made available pursuant to an effective transaction reporting
plan, or an effective national market system plan for reporting
transactions in listed options.'' 17 CFR 242.600(b)(47). ``NMS
Security'' refers to ``exchange-listed equity securities and
standardized options, but does not include exchange-listed debt
securities, securities futures, or open-end mutual funds, which are
not currently reported pursuant to an effective transaction
reporting plan.'' See Question 1.1 in the ``Responses to Frequently
Asked Questions Concerning Large Trader Reporting,'' available at:
<a href="https://www.sec.gov/divisions/marketreg/large-trader-faqs.htm">https://www.sec.gov/divisions/marketreg/large-trader-faqs.htm</a>.
\9\ Shares of Active Proxy Portfolio Shares and Managed
Portfolio Shares, which are issued by funds whose portfolios are not
fully transparent, already are exempted from the general
prohibition. See NYSE Rule 8P.
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The Commission previously approved integrated market making and
side-by-side trading for ``broad-based'' exchange traded funds, Trust-
Issued Receipts, and related options.\10\ According to the Exchange,
under Commission precedent, (1) integrated market making and side-by-
side trading in both the ETP and related options is permissible--with
no additional requirement for information barriers or physical or
organizational separation--where the ETP is ``broad-based,'' i.e., not
readily susceptible to manipulation; (2) an ETP is broad-based when its
the individual components are sufficiently liquid and well-capitalized
and the product is not over-concentrated; and (3) to determine whether
an ETP is broad-based, the Commission has relied on an exchange's
listing standards.\11\ In support of its proposal, the Exchange
analyzes aspects of its existing--and in the case of Exchange-Traded
Fund Shares, its proposed--listing criteria for shares of the specified
ETPs and concludes that they are sufficiently ``broad-based'' to
address potential manipulation concerns arising out of trading those
shares on the same physical trading floor as one or more underlying
NYSE-listed securities.\12\
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\10\ See Securities Exchange Act Release No. 46213, 67 FR 48232
(SR-Amex-2002-21); see also Securities Exchange Act Release No.
62479 (July 9, 2010), 75 FR 41264 (July 15, 2010) (SR-Amex-2010-31)
(approving side-by-side trading and integrated market making in the
QQQ ETF and certain of its component securities where the QQQs met
the composition and concentration measures to be classified as a
broad-based ETF).
\11\ See Notice, supra note 3, 87 FR at 4983.
\12\ See id., 87 FR at 4984-85
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The Exchange also proposes to amend a rule regarding integrated
market making,\13\ which is the practice of the same person or firm
making markets in an equity security and its related derivative
product. NYSE assigns each of securities it lists to a Designated
Market Maker (``DMM''), and trading is on the floor of the Exchange.
Integrated market making could be implicated if NYSE starts listing
ETPs with an underlying NYSE Component Security because each ETP would
be assigned to a DMM and that DMM also may be assigned one or more NYSE
Component Securities that underlie the ETP's underlying index or
portfolio. The Exchange proposes to narrow the definition of ``related
products'' to exclude derivative instruments that overlie ETPs listed
under NYSE Rules 5.2(j)(3), Supplementary Material .01(a);
5.2(j)(6)(B)(I); 5.2(j)(8)(e)(1)(B); 8.100, Supplementary Material
.01(a)(A); 8.600 Supplementary Material .01(a); 8.601; or 8.900.
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\13\ Current NYSE Rule 98(c)(6) prohibits DMM units from
operating as a specialist or market maker on the Exchange in
``related products'' unless specifically permitted in Exchange
rules.
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While informational advantage is a concern with respect to
integrated market making,\14\ the Exchange asserts that there are
sufficient safeguards in place to prohibit the misuse of material
nonpublic information by a member organization that operates a DMM
unit. Specifically, the Exchange asserts that Rule 98 contains narrowly
tailored restrictions to address that DMMs while on the floor may have
access to certain floor-based non-public information and requires DMM
units to maintain procedures and controls to prevent the misuse of
material, non-public information that are effective and appropriate for
that member organization.\15\
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\14\ See Securities Exchange Act Release No. 46213, supra note
10, 67 FR at 48235.
\15\ See id., 87 FR at 4986.
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According to the Exchange, trading on the Exchange is subject to a
comprehensive regulatory program that includes a suite of surveillances
and routine examinations that review trading by DMMs and other market
participants on the Exchange's trading floor, including surveillances
designed to monitor for trading ahead and manipulative activity.\16\ To
assist Exchange surveillance of DMM trading activity, a member
organization operating a DMM unit must daily provide the Exchange with
net position information in DMM securities by the DMM unit and any
independent trading unit of which it is part for such times and in the
manner prescribed by the Exchange pursuant to Rule 98(c)(5).\17\ In
addition, routine examinations are conducted consistent with the
current exam-based regulatory program associated with Rule 98 that
reviews member organizations operating DMM units for compliance with
the above-described policies and procedures to protect against the
misuse of material nonpublic information.\18\ Lastly, the Exchange
asserts that DMM market making activity is not materially different
from market making on other exchanges and that these existing programs
are reasonably designed to address any concerns that may be raised by
the trading of the specified listed ETPs that have underlying NYSE
Component Securities.\19\
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\16\ See id., 87 FR at 4987.
\17\ See id.
\18\ See id.
\19\ See id.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-NYSE-
2019-54 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \20\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. 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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\20\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\21\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section
[[Page 26380]]
6(b)(5) of the Act, 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.'' \22\
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\21\ Id.
\22\ 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, in addition to any other comments they may wish to
submit about the proposed rule change. In particular, the Commission
seeks comment on the following questions and asks commenters to submit
data where appropriate to support their views.
1. What are commenters' views generally on whether the Exchange's
proposal to implement side-by-side trading and integrated market making
for certain ETPs to be listed and traded on the Exchange is consistent
with Section 6(b)(5) of the Act, which requires that the Exchange's
rules be designed to, among other things, prevent fraudulent and
manipulative acts and practices?
2. Do the quantitative generic listing criteria of current Rules
5.2(j)(3), Supplementary Material .01(a) (applicable to Investment
Company Units), 5.2(j)(6)(B)(I) (applicable to Equity Index-Linked
Securities), and proposed Rule 5.2(j)(8), as well as the generic
listing criteria of current NYSE Rules 8.100 (applicable to Portfolio
Depositary Receipts) and 8.600 (applicable to Managed Fund Shares)
adequately address the concerns reflected in the ``broad-based'' test
previously articulated by the Commission with respect to side-by-side
trading and integrated market making? \23\ If not, why? Should the
Commission consider other factors in reviewing side-by-side trading and
integrated market making?
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\23\ See supra note 10.
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3. What are commenters' views about whether the proposed changes to
Rule 98 to exclude the specified ETPs listed on the Exchange from the
definition of ``related products'' would remove impediments to and
perfect the mechanism of a free and open market and a national market
system? Do commenters agree that such changes would facilitate the
assignment of listed ETPs, including ETPs with underlying NYSE
Component Securities that meet the specified listing rules in Rules 5P
and 8P, to DMMs and permit DMMs to trade such listed ETPs consistent
with existing Rules governing DMM trading? If so, why? If not, why not?
4. What informational advantage (if any) over other market
participants with respect to trading an ETP or its underlying
securities might a DMM (or other member) obtain as a result of the
proposed implementation of side-by-side trading and integrated market
making for ETPs with underlying NYSE Component Securities? What
concerns, if any, do commenters have about the potential for a DMM (or
other member) to misuse material, non-public information?
III. 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 proposal 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, any request for an
opportunity to make an oral presentation.\24\
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\24\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Pub. L. 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 Act 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 May 25, 2022. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 8,
2022. The Commission asks that commenters address the sufficiency of
the Exchange's statements in support of the proposal, in addition to
any other comments they may wish to submit about the proposed rule
change.
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c9bbbca5ace4aaa6a4a4aca7bdba89baacaae7aea6bf"><span class="__cf_email__" data-cfemail="9be9eef7feb6f8f4f6f6fef5efe8dbe8fef8b5fcf4ed">[email protected]</span></a>. Please include
File Number SR-NYSE-2022-04 on the subject line.
Paper Comments
<bullet> 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-NYSE-2022-04. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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-NYSE-2022-04 and should be submitted by
May 25, 2022. Rebuttal comments should be submitted by June 8, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-09519 Filed 5-3-22; 8:45 am]
BILLING CODE P
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