Notice2024-09328
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Disapproving a Proposed Rule Change To Amend the Initial Period After Commencement of Trading of a Series of Exchange-Traded Fund 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
May 1, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 85 (Wednesday, May 1, 2024)</title>
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[Federal Register Volume 89, Number 85 (Wednesday, May 1, 2024)]
[Notices]
[Pages 35252-35255]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-09328]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100032; File No. SR-CboeBZX-2023-062]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Disapproving a Proposed Rule Change To Amend the Initial Period After
Commencement of Trading of a Series of Exchange-Traded Fund Shares on
the Exchange as It Relates to the Holders of Record and/or Beneficial
Holders, as Provided in Exchange Rule 14.11(l)
April 25, 2024.
I. Introduction
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 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the continued listing
requirement applicable to Exchange-Traded Fund Shares (``ETF Shares'')
relating to holders of record and/or beneficial holders pursuant to BZX
Rule 14.11(l). The proposed rule change was published for comment in
the Federal Register on September 1, 2023.\3\
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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. 98231 (August 28,
2023), 88 FR 60516 (``Notice'').
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On September 25, 2023, pursuant to Section 19(b)(2) of the Exchange
Act, 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.\4\ On November 14, 2023, the Commission instituted
proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act \5\ to
determine whether to approve or disapprove the proposed rule change.\6\
On February 13, 2024, the Commission designated a longer period for
Commission action on the proposed rule change.\7\ The Commission has
received no comments on the proposed rule change.
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\4\ See Securities Exchange Act Release No. 98497, 88 FR 67397
(September 29, 2023).
\5\ 15 U.S.C. 78s(b)(2)(B).
\6\ See Securities Exchange Act Release No. 98933, 88 FR 80783
(November 20, 2023) (``OIP'').
\7\ See Securities Exchange Act Release No. 99530, 89 FR 12891
(February 20, 2024).
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This order disapproves the proposed rule change because, as
discussed below, BZX has not met its burden under the Exchange Act and
the Commission's Rules of Practice to demonstrate that its proposal is
consistent with the requirements of Exchange Act Section 6(b)(5), and,
in particular, the requirement that the rules of a national securities
exchange be designed ``to prevent fraudulent and manipulative acts and
practices'' and ``to protect investors and the public interest.'' \8\
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\8\ 15 U.S.C. 78f(b)(5).
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II. Description of the Proposal <SUP>9</SUP>
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\9\ On April 29, 2020, BZX filed a proposed rule change to
extend the Non-Compliance Period (as defined herein) in the
Beneficial Holders Rule (as defined herein) from 12 months after
commencement of trading on the Exchange to 36 months after
commencement of trading on the Exchange for certain exchange-traded
products, including a series of ETF Shares. See Securities Exchange
Act Release No. 88795 (May 1, 2020), 85 FR 27254 (SR-CboeBZX-2020-
036) (``Prior PRC Notice'' or ``prior proposal''). The Commission
disapproved the prior proposal, finding that the Exchange failed to
satisfy its burden to demonstrate that the proposed rule change is
consistent with the Exchange Act and the rules and regulations
issued thereunder. See Securities Exchange Act Release No. 90819
(December 29, 2020), 86 FR 332 (January 5, 2021) (SR-CboeBZX-2020-
036) (``Prior Disapproval Order''). In the current proposed rule
change, BZX proposes the same extension of the Non-Compliance Period
in the Beneficial Holders Rule from 12 months after commencement of
trading on the Exchange to 36 months after commencement of trading
on the Exchange, but only with respect to ETF Shares.
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As described in detail in the Notice and OIP, a continued listing
[[Page 35253]]
requirement under BZX Rule 14.11(l) for ETF Shares \10\ 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 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''). 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 the Beneficial Holders Rule (``Non-
Compliance Period''). Specifically, the Exchange seeks to extend the
Non-Compliance Period in the Beneficial Holders Rule from 12 months
after commencement of trading on the Exchange to 36 months after
commencement of trading on the Exchange.
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\10\ BZX Rule 14.11(l)(3)(A) defines ETF Shares as shares of
stock issued by an Exchange-Traded Fund. The term ``Exchange-Traded
Fund'' has the same meaning as the term ``exchange-traded fund''
defined in Rule 6c-11 under the Investment Company Act of 1940. See
BZX Rule 14.11(l)(3)(B).
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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''); \11\ (2) the economic and competitive structures in
place in the ETP ecosystem naturally incentivize issuers to delist
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
Beneficial Holders Rule is intended to address.
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\11\ A series of ETF Shares is a type of ETP.
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According to the Exchange, the ETP space is more competitive than
it has ever been, with more than 2,000 ETPs listed on exchanges. As a
result, distribution platforms have become more restrictive about the
ETPs they will allow on their systems, often requiring a minimum track
record (e.g., twelve months) and a minimum level of assets under
management (e.g., $100 million). Many larger entities also require a
one-year track record before they will invest in an ETP. In the
Exchange's view, this has slowed the growth cycle of the average ETP,
with the result that the Exchange has seen a significant number of
deficiencies with respect to the Beneficial Holders Rule over the last
several years. Specifically, the Exchange states that it has issued
deficiency notifications to 39 ETPs for non-compliance with the
Beneficial Holders Rule since 2015. Of those 39 ETPs, 30 ultimately
were able to achieve compliance while undergoing the delisting process.
According to the Exchange, this data shows that a 12-month threshold is
an inappropriately short time frame and only serves as a regulatory and
administrative burden for issuers that must remediate if they fall out
of compliance.
In addition, the Exchange believes that the economic and
competitive structures in place in the ETP ecosystem naturally
incentivize issuers to delist 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. 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. 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.
The Exchange states that the proposal ``does not create any
significant change in the risk of manipulation for ETF Shares listed on
the Exchange.'' \12\ The Exchange contends that a time extension to
meet the requirement would present no new issues because any risk that
is present during months 12 through 36 of initial listing would also be
present during the first 12 months.\13\ 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 of
the Intermarket Surveillance Group. The Exchange believes that its
surveillance procedures will act to mitigate any manipulation concerns
that arise from extending the compliance period for the Beneficial
Holders Rule from 12 months to 36 months.\14\
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\12\ See Notice, supra note 3, 88 FR at 60518.
\13\ See id.
\14\ See id.
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Lastly, the Exchange takes the position that other continued
listing standards (e.g., the disclosure obligations applicable under
Rule 6c-11 of the Investment Company Act of 1940 for series of ETF
Shares) are generally sufficient to mitigate manipulation concerns
associated with ETF Shares.\15\
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\15\ See id.
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III. Discussion and Commission Findings
The Commission must consider whether BZX's proposal is consistent
with Section 6(b)(5) of the Exchange Act, which requires, in relevant
part, that the rules of a national securities exchange be designed ``to
prevent fraudulent and manipulative acts and practices'' and ``to
protect investors and the public interest.'' \16\ 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.'' \17\
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\16\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act. Exchange Act Section
6(b)(5) states that an exchange shall not be registered as a
national securities exchange unless the Commission determines that
``[t]he rules of the exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, 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, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.'' 15 U.S.C. 78(f)(b)(5).
\17\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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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,\18\ 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
[[Page 35254]]
applicable rules and regulations.\19\ Moreover, ``unquestioning
reliance'' on an SRO's representations in a proposed rule change is not
sufficient to justify Commission approval of a proposed rule
change.\20\
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\18\ See id.
\19\ See id.
\20\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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The Commission has consistently recognized the importance of the
Beneficial Holders Rule and other similar requirements, stating that
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.\21\ As stated by the Exchange, the Beneficial Holders Rule is
intended to ensure that trading in ETF Shares is not susceptible to
manipulation.\22\
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\21\ 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). See also Prior Disapproval Order, supra note 9, 86 FR
at 334.
\22\ See Notice, supra note 3, 88 FR at 60518. See also Prior
PRC Notice, supra note 9, 85 FR at 27255.
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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 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 states that some ETPs
have had difficulty complying with the Beneficial Holders Rule,\23\ and
that the existing Beneficial Holders Rule forces the delisting of ETPs
that issuers believe may still be economically viable.\24\ However, the
Exchange does not sufficiently support its assertion that compliance
with the Beneficial Holders Rule is especially difficult for ETF Shares
or that any such compliance difficulties have led to the delisting of
economically viable ETPs. For example, BZX states that it has issued
deficiency notifications to 39 series of ETPs for noncompliance with
the Beneficial Holders Rule since 2015 and, of those 39 series, 30
attained compliance after issuance of the deficiency notice.\25\ These
data indicate that, at most, the Exchange delisted nine series of ETPs
over eight years for non-compliance with this requirement. However, BZX
has not established how many (if any) of those nine series of ETPs were
ETF Shares \26\ or that they were delisted solely for non-compliance
with the Beneficial Holders Rule.\27\
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\23\ Although the Exchange's proposed rule change is focused on
ETF Shares, the Exchange's discussion refers to ETPs more generally.
\24\ See Notice, supra note 3, 88 FR at 60518.
\25\ See id. at 60517.
\26\ As noted above, ETF Shares are a subset of ETPs. See id. at
60517, n.7. Additionally, BZX does not disclose how many of those 9
delistings occurred after April 6, 2020, when the Commission
approved the adoption of BZX Rule 14.11(l), which permits the
listing and trading of ETF Shares on the Exchange. See Securities
Exchange Act Release No. 88566 (April 6, 2020), 85 FR 20312 (April
10, 2020) (SR-CboeBZX-2019-097).
\27\ BZX did not establish that the nine delisted issues
complied with all other applicable listing requirements, and
therefore were delisted only because of their non-compliance with
the Beneficial Holders Rule.
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Additionally, the Exchange does not sufficiently explain why any
such compliance difficulties, or the need to remediate the applicable
deficiencies, justify tripling the Non-Compliance Period for this core
quantitative listing standard from one year to three years, and
permitting ETF Shares to trade on the Exchange for an additional two
years without the protections described above that the Beneficial
Holders Rule was designed to provide. For example, the Exchange states
that no new manipulation concerns would arise with a longer Non-
Compliance Period than a shorter one because any 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.\28\
However, the Exchange does not address why tripling the period during
which the same regulatory risks posed by a Non-Compliance Period would
be present is consistent with the Exchange Act. As discussed above, the
Beneficial Holders Rule and other minimum number of holders
requirements are important to ensure that trading in exchange listed
securities is fair and orderly and not susceptible to manipulation, and
the Exchange does not explain why it is consistent with the Exchange
Act to permit ETF Shares to trade for two additional years without any
of the protections of investors and the public interest provided by the
Beneficial Holders Rule.
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\28\ See Notice, supra note 3, 88 FR at 60518.
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Finally, while the Exchange asserts that existing surveillances and
other listing standards are sufficient to mitigate manipulation
concerns, it does not offer a sufficient explanation of the basis for
that view or provide supporting information or evidence to support its
conclusion. Notably, although the Exchange acknowledges that the
Beneficial Holders Rule is designed to ensure that trading in exchange-
listed securities is not susceptible to manipulation, the Exchange does
not explain how any of its specific existing surveillances or other
listing requirements effectively address, in the absence of the
Beneficial Holders Rule, those manipulation concerns and other
regulatory risks to fair and orderly markets, investor protection and
the public interest.\29\ Accordingly, the Commission is unable to
assess whether the Exchange's assertion has merit.
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\29\ The Exchange states that its surveillances focus on
detecting securities trading outside of their normal patterns,
followed by surveillance analysis and investigations, where
appropriate, to review the behavior of all relevant parties for all
relevant trading violations. The Exchange also states that it or the
Financial Industry Regulatory Authority, on behalf of the Exchange,
or both, communicate as needed regarding ETP trading with other
markets and the Intermarket Surveillance Group member entities, and
may obtain trading information in ETPs from such markets and other
entities.
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The Commission identified its concerns with this proposal in the
OIP,\30\ but the Exchange did not adequately respond or provide
additional data addressing these concerns. As stated above, 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\ The Commission concludes that, because BZX has not
demonstrated that its proposal is designed to prevent fraudulent and
manipulative acts and practices or to protect investors and the public
interest, the Exchange has not met its burden to demonstrate that its
proposal is consistent with Section
[[Page 35255]]
6(b)(5) of the Exchange Act.\33\ For this reason, the Commission must
disapprove the proposal.
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\30\ See OIP, supra note 6, 88 FR at 80784-5; see also Prior
Disapproval Order, supra note 9.
\31\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\32\ See id.
\33\ In disapproving 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). Although
the Exchange states that the regulatory and administrative burdens
of the Beneficial Holders Rule makes it more difficult for smaller
issuers to compete because they have limited resources to overcome
legal, marketing, or other obstacles associated with this
requirement (see Notice, 88 FR at 60517), as discussed above, BZX
has failed to establish that its Beneficial Holders Rule is
unnecessary or that smaller issuers of ETF Shares actually have been
negatively impacted by it.
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IV. Conclusion
For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange, and, in particular, with Section 6(b)(5) of the
Exchange Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that proposed rule change SR-CboeBZX-2023-062 is
disapproved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-09328 Filed 4-30-24; 8:45 am]
BILLING CODE 8011-01-P
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