Notice2023-25546
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend the Initial Period After Commencement of Trading of a Series of ETF Shares on the Exchange as It Relates to the Holders of Record and/or Beneficial Holders, as Provided in Exchange Rule 14.11(l)
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
November 20, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 222 (Monday, November 20, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 222 (Monday, November 20, 2023)]
[Notices]
[Pages 80783-80786]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-25546]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98933; File No. SR-CboeBZX-2023-062]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Amend the Initial Period After Commencement of
Trading of a Series of ETF Shares on the Exchange as It Relates to the
Holders of Record and/or Beneficial Holders, as Provided in Exchange
Rule 14.11(l)
November 14, 2023.
On August 14, 2023, Cboe BZX Exchange, Inc. (``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the initial period after
commencement of trading of a series of ETF Shares on the Exchange as it
specifically relates to holders of record and/or beneficial holders
under BZX Rule 14.11(l). The proposed rule change was published for
comment in the Federal Register on September 1, 2023.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 98231 (August 28,
2023), 88 FR 60516 (``Notice'').
---------------------------------------------------------------------------
On September 25, 2023, 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\ This order institutes proceedings under Section 19(b)(2)(B)
of the Act \6\ to determine
[[Page 80784]]
whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 98497 (September 25,
2023), 88 FR 67397 (September 29, 2023) (designating November 30,
2023, as the date by which the Commission will either approve or
disapprove, or institute proceedings to determine whether to
disapprove, the proposed rule change). The Commission has received
no comments on the proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
I. Description of the Proposal
A continued listing requirement for ETF Shares \7\ currently
provides that, following the initial 12-month period after commencement
of trading on the Exchange, the Exchange will consider the suspension
of trading in, and will commence delisting proceedings under BZX Rule
14.12 for, a series of ETF Shares for which there are fewer than 50
beneficial holders for 30 or more consecutive trading days
(``Beneficial Holders Rule'').\8\ The Exchange is proposing to change
the date after which a series of ETF Shares must have at least 50
beneficial holders or be subject to delisting proceedings under BZX
Rule 14.12 (``Non-Compliance Period''). Specifically, the Exchange
seeks to extend the Non-Compliance Period from 12 months after
commencement of trading on the Exchange to 36 months after commencement
of trading on the Exchange.\9\
---------------------------------------------------------------------------
\7\ The term ``ETF Shares'' means shares of stock issued by an
Exchange-Traded Fund. See BZX Rule 14.11(l)(3)(A). The term
``Exchange-Traded Fund'' has the same meaning as the term
``exchange-traded fund'' as defined in Rule 6c-11 under the
Investment Company Act of 1940 (``1940 Act''). See BZX Rule
14.11(l)(3)(B).
\8\ See BZX Rule 14.11(l)(4)(B)(i)(c).
\9\ Earlier, on April 29, 2020, the Exchange filed a proposed
rule change to extend the Non-Compliance Period of the Beneficial
Holders Rule applicable to Index Fund Shares, Managed Fund Shares,
and ETF Shares from 12 to 36 months. The Commission disapproved that
proposed rule change. See Securities Exchange Act Release No. 90819
(December 29, 2020), 86 FR 332 (January 5, 2021).
---------------------------------------------------------------------------
The Exchange asserts that it would be appropriate to increase the
Non-Compliance Period from 12 months to 36 months because: (1) it would
bring the rule more in line with the life cycle of an exchange-traded
product (``ETP''); \10\ (2) the economic and competitive structures in
place in the ETP ecosystem naturally incentivize issuers to de-list
products rather than continuing to list products that do not garner
investor interest; and (3) extending the period from 12 to 36 months
will not meaningfully impact the manipulation concerns that the
continued listing standard is intended to address.\11\
---------------------------------------------------------------------------
\10\ The Exchange notes that ETF Shares is a type of ETP.
\11\ See Notice, 88 FR at 60517.
---------------------------------------------------------------------------
According to the Exchange, the ETP space is more competitive that
it has ever been, with more than 2,000 ETPs listed on exchanges.\12\ As
a result, distribution platforms have become more restrictive about the
ETPs they will allow on their systems, often requiring a minimum
existing track record (e.g., at least twelve months) and a minimum
level of assets under management (e.g., at least $100 million).\13\
Many larger entities also require a one-year track record before they
will invest in an ETP.\14\ In the Exchange's view, this has slowed the
growth cycle of the average ETP and has resulted in a significant
number of deficiencies with respect to satisfying the Beneficial
Holders Rule over the last several years.\15\ Specifically, the
Exchange notes that it has issued deficiency notifications to 39 ETPs
for non-compliance with the Beneficial Holders Rule since 2015, 30 of
which ultimately were able to achieve compliance after the deficiency
notice was issued.\16\
---------------------------------------------------------------------------
\12\ See id.
\13\ See id.
\14\ See id.
\15\ See id.
\16\ See id.
---------------------------------------------------------------------------
In addition, the Exchange believes that the economic and
competitive structures in place in the ETP ecosystem naturally
incentivize issuers to de-list products with insufficient investor
interest, and that the Beneficial Holders Rule has resulted in the
forced termination of ETPs that issuers believed were still
economically viable.\17\ The Exchange states that there are significant
costs associated with the launch and continued operation of an ETP, and
notes that the Exchange has had 148 products voluntarily delist since
2018.\18\ The Exchange also questions whether the number of beneficial
holders is a meaningful measure of market interest in an ETP, and
believes that an ETP issuer is incentivized to have as many beneficial
holders as possible.\19\
---------------------------------------------------------------------------
\17\ See id. at 60518.
\18\ See id.
\19\ See id.
---------------------------------------------------------------------------
Finally, the Exchange states that the proposal ``does not create
any significant change in the risk of manipulation for ETF Shares
listed on the exchange.'' \20\ The Exchange points out that the
Beneficial Holders Rule does not apply during the first 12 months that
an issue of ETF Shares is listed on the Exchange. Therefore, according
to BZX, ``[a]ny risk that is present during months 12 through 36 of
initial listing would also be present during the first 12 months as
provided under current rules.'' \21\ The Exchange also states that it
has in place a robust surveillance program for ETPs that it believes is
sufficient to deter and detect manipulation and other violative
activity, and that the Exchange (or the Financial Industry Regulatory
Authority on its behalf) communicates as needed with other members and
other entities of the Intermarket Surveillance Group.\22\ The Exchange
believes that ``these robust surveillance procedures successfully
mitigated manipulation concerns during an ETPs first 12 months of
listing on the Exchange, during which there is currently no Beneficial
Holder requirement,'' and that ``these surveillance procedures will act
to mitigate any manipulation concerns that arise from extending the
compliance period for the Beneficial Holders Rules from 12 months to 36
months.'' \23\ Lastly, the Exchange asserts that other continued
listing standards (the disclosure obligations applicable under Rule 6c-
11 of the 1940 Act for series of ETF Shares) ``are generally sufficient
to mitigate manipulation concerns associated with ETF Shares.'' \24\
---------------------------------------------------------------------------
\20\ Id.
\21\ Id.
\22\ See id.
\23\ Id.
\24\ Id.
---------------------------------------------------------------------------
II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2023-062 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \25\ 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.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\26\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of and input concerning the proposed rule change's consistency
with the Act and, in particular, Section 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, 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
[[Page 80785]]
permit unfair discrimination between customers, issuers, brokers, or
dealers.'' \27\
---------------------------------------------------------------------------
\26\ Id.
\27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has consistently recognized the importance of the
minimum number of holders and other similar requirements in exchange
listing standards. Among other things, such listing standards help
ensure that exchange listed securities have sufficient public float,
investor base, and trading interest to provide the depth and liquidity
necessary to promote fair and orderly markets.\28\
---------------------------------------------------------------------------
\28\ See, e.g., Securities Exchange Act Release No. 57785 (May
6, 2008), 73 FR 27597 (May 13, 2008) (SR-NYSE-2008-17) (stating that
the distribution standards, which includes exchange holder
requirements ``. . . should help to ensure that the [Special Purpose
Acquisition Company's] securities have sufficient public float,
investor base, and liquidity to promote fair and orderly markets'');
Securities Exchange Act Release No. 86117 (June 14, 2019), 84 FR
28879 (June 20, 2018) (SR-NYSE-2018-46) (disapproving a proposal to
reduce the minimum number of public holders continued listing
requirement applicable to Special Purpose Acquisition Companies from
300 to 100).
---------------------------------------------------------------------------
As discussed above, the Exchange is proposing to increase the Non-
Compliance Period from 12 months to 36 months, thereby extending by two
years the length of time during which a series of ETF Shares listed on
the Exchange would have no requirement to have a minimum number of
beneficial holders. In support of its proposal, the Exchange emphasizes
that some ETPs have had difficulty complying with the Beneficial
Holders Rule. The Exchange indicates that non-compliance with the
Beneficial Holders Rule is increasing because the ETP market has become
so competitive, and there are so many of them, that it can be difficult
to acquire the requisite number of beneficial holders within the
existing Non-Compliance Period. The Exchange also believes that the
existing Beneficial Holders Rule forces the delisting of ETPs that may
still be economically viable.
While the Exchange takes the position that the highly competitive
ETP market has made compliance with the Beneficial Holders Rule
difficult, and led to the delisting of ETPs that may be economically
viable, the Exchange does not explain why these compliance difficulties
justify extending the Non-Compliance Period for this core quantitative
listing standard for an additional two years. The Exchange does not
explain why the manipulation and other regulatory risks would not be
greater with a very small number of beneficial holders, and tripling
the period during which the same regulatory risks posed by a Non-
Compliance Period would be present is consistent with the Exchange Act.
The Exchange states that no new manipulation concerns would arise with
a longer Non-Compliance Period than a shorter one, and that existing
surveillances and other listing standards sufficient to mitigate
manipulation concerns for 12 months are sufficient for 36 months,\29\
but does not explain in any detail the basis for this view,\30\ or the
impact of its proposal on the maintenance of fair and orderly markets
or other applicable Exchange Act standards.
---------------------------------------------------------------------------
\29\ See Notice, 88 FR at 60518.
\30\ Specifically, BZX does not discuss why it believes that
existing surveillance procedures ``successfully mitigated
manipulation concerns'' during the first 12 months after listing.
---------------------------------------------------------------------------
Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder. . .is on the self-
regulatory organization [`SRO'] that proposed the rule change.'' \31\
The description of a proposed rule change, its purpose and operation,
its effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding, and any failure of an SRO to provide
this information may result in the Commission not having a sufficient
basis to make an affirmative finding that a proposed rule change is
consistent with the Exchange Act and the applicable rules and
regulations.\32\
---------------------------------------------------------------------------
\31\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\32\ See id.
---------------------------------------------------------------------------
For these reasons, the Commission believes it is appropriate to
institute proceedings pursuant to Section 19(b)(2)(B) of the Act to
determine whether the proposal should be approved or disapproved.
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, and
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.\33\
---------------------------------------------------------------------------
\33\ Section 19(b)(2) of the Act, as amended by the Securities
Act 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 Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by December 11, 2023. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
December 26, 2023.
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#443631282169272b2929212a3037043721276a232b32"><span class="__cf_email__" data-cfemail="0173746d642c626e6c6c646f7572417264622f666e77">[email protected]</span></a>. Please include
file number SR-CboeBZX-2023-062 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-CboeBZX-2023-062. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the
[[Page 80786]]
Exchange. Do not include personal identifiable information in
submissions; you should submit only information that you wish to make
available publicly. We may redact in part or withhold entirely from
publication submitted material that is obscene or subject to copyright
protection. All submissions should refer to file number SR-CboeBZX-
2023-062 and should be submitted on or before December 11, 2023.
Rebuttal comments should be submitted by December 26, 2023.
---------------------------------------------------------------------------
\34\ 17 CFR 200.30-3(a)(57).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-25546 Filed 11-17-23; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on November 20, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.