[Federal Register Volume 84, Number 228 (Tuesday, November 26, 2019)]
[Notices]
[Pages 65206-65208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25586]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87576; File No. SR-NYSEArca-2019-14]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change, as Modified by Amendment No. 1, Relating to the 
Permitted Investments of the PGIM Ultra Short Bond ETF

November 20, 2019.

I. Introduction

    On March 13, 2019, 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 
make certain changes to the listing rule for shares (``Shares'') of the 
PGIM Ultra Short Bond ETF (``Fund''). The proposed rule change was 
published for comment in the Federal Register on April 2, 2019.\3\ On 
May 10, 2019, 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\ On June 27, 2019, the Commission instituted proceedings 
pursuant to Section 19(b)(2)(B) of the Act \6\ to determine whether to 
approve or disapprove the proposed rule change.\7\ On September 23, 
2019, the Commission designated a longer period within which to issue 
an order approving or disapproving the proposed rule change.\8\ On 
November 14, 2019, the Exchange filed Amendment No. 1 to the proposed 
rule change.\9\ The Commission has received no comment letters on the 
proposal. This order approves the proposed rule change, as modified by 
Amendment No. 1.
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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. 85430 (Mar. 27, 
2019), 84 FR 12646 (Apr. 2, 2019) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85829 (May 10, 
2019), 84 FR 22221 (May 16, 2019). The Commission designated July 1, 
2019, as the date by which the Commission shall approve or 
disapprove, or institute proceedings to determine whether to approve 
or disapprove, the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 86220, 84 FR 31868 
(Jul. 3, 2019).
    \8\ See Securities Exchange Act Release No. 87058, 84 FR 51210 
(Sep. 27, 2019).
    \9\ In Amendment No. 1, the Exchange supplemented the proposed 
rule change by adding additional details regarding certain of the 
asset backed securities in which the Fund may invest. Amendment No. 
1 is available at: https://www.sec.gov/comments/sr-nysearca-2019-14/srnysearca201914-6425213-198531.pdf.
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II. Description of the Proposal

A. The Fund and the Shares

    PGIM Investments LLC (``Adviser'') is the investment adviser for 
the Fund. PGIM Fixed Income (``Subadviser''), a unit of PGIM, Inc., is 
the subadviser to the Fund. According to the Exchange, the investment 
objective of the Fund is to seek total return through a combination of 
current income and capital appreciation, consistent with preservation 
of capital. The Fund seeks to achieve its investment objective by 
investing primarily in a portfolio of U.S. dollar denominated short-
term fixed, variable and floating rate debt instruments. Under normal 
market conditions,\10\ the Fund invests at least 80% of its net assets 
(plus any borrowings for investment purposes) in a portfolio of 
financial instruments consisting of (1) the Principal Investment 
Instruments (as defined in the First Prior Order); and (2) derivatives 
(as described in the Prior Orders) that (a) provide exposure to such 
Principal Investment Instruments, or (b) are used to enhance returns, 
manage portfolio duration, or manage the risk of securities price 
fluctuations, as described in the Prior Orders.\11\
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    \10\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
    \11\ The terms ``First Prior Order'' and ``Prior Orders'' are 
defined infra at note 13.
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    The Shares commenced trading on the Exchange on April 10, 2018, 
pursuant to the generic listing standards under Commentary .01 to NYSE 
Arca Rule 8.600-E (``Managed Fund Shares'').\12\ Since then, the 
Exchange has proposed--and the Commission has approved--two proposed 
rule changes to expand the permitted investments of the Fund beyond 
what is permitted under the generic listing requirements.\13\ By this 
proposed rule change, the Exchange proposes to again amend the listing 
rule applicable to the Shares.
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    \12\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) organized as an open-end 
investment company or similar entity that invests in a portfolio of 
securities selected by its investment adviser consistent with its 
investment objectives and policies. In contrast, an open-end 
investment company that issues Investment Company Units, listed and 
traded on the Exchange under NYSE Arca Rule 5.2-E(j)(3), seeks to 
provide investment results that correspond generally to the price 
and yield performance of a specific foreign or domestic stock index, 
fixed income securities index or combination thereof.
    \13\ See Securities Exchange Act Release No. 83319 (May 24, 
2018), 83 FR 25097 (May 31, 2018) (SR-NYSEArca-2018-15) (``First 
Prior Order''); and Securities Exchange Act Release No. 84818 
(December 13, 2018) (SR-NYSEArca-2018-75) (together with the First 
Prior Order, ``Prior Orders'').
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B. The Proposed Modifications to the Shares' Listing Rule

    The Exchange proposes to amend two requirements of the Shares' 
current listing rule as set forth in the First Prior Order, namely the 
requirements that: (1) The Fund's investments in non-U.S. Government, 
non-agency, non-GSE and other privately issued asset backed securities 
(including mortgage-backed securities) (``Private ABS/MBS'') are 
limited to 20% of the total assets of the Fund;\14\ and (2) the Fund 
may invest

[[Page 65207]]

only 10% of its total assets in fixed income securities that do not 
satisfy the criteria of Commentary .01(b)(4) to NYSE Arca Rule 8.600-
E.\15\
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    \14\ At the time the proposed rule change was filed, Commentary 
.01(b)(5) to NYSE Arca Rule 8.600-E provided that non-agency, non-
government sponsored entity and privately issued mortgage-related 
and other asset-backed securities components of a portfolio may not 
account, in the aggregate, for more than 20% of the weight of the 
fixed income portion of the portfolio. Recently, however, the 
Exchange amended Commentary .01(b)(5) to NYSE Arca Rule 8.600-E, and 
it now provides that non-agency, non-government sponsored entity and 
privately issued mortgage-related and other asset-backed securities 
components of a portfolio may not account, in the aggregate, for 
more than 20% of the weight of the portfolio. See Securities 
Exchange Act Release No. 86017 (June 3, 2019), 84 FR 26711 (June 7, 
2019) (SR-NYSEArca-2019-06).
    \15\ Commentary .01(b)(4) requires that at least 90% of the 
fixed income weight of the portfolio must be either: (a) From 
issuers that are required to file reports pursuant to Sections 13 
and 15(d) of the Act; (b) from issuers that have a worldwide market 
value of its outstanding common equity held by non-affiliates of 
$700 million or more; (c) from issuers that have outstanding 
securities that are notes, bonds debentures, or evidence of 
indebtedness having a total remaining principal amount of at least 
$1 billion; (d) exempted securities as defined in Section 3(a)(12) 
of the Act; or (e) from issuers that are a government of a foreign 
country or a political subdivision of a foreign country.
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    The Exchange proposes to modify the Fund's current limit on Private 
ABS/MBS by removing collateralized debt obligations (``CDOs'') \16\ 
from the definition of Private ABS/MBS and by allowing the Fund to 
invest up to 20% of its total assets in CDOs. Therefore, the Exchange 
is proposing to allow up to 40% of the Fund's portfolio to be composed 
of what had previously been defined as Private ABS/MBS. The Exchange 
asserts that the ability to invest up to 20% of the Fund's portfolio in 
CDOs would help the Fund maintain portfolio diversification and would 
reduce manipulation risk.\17\ The Exchange argues that CDOs can be 
distinguished from asset backed securities (``ABS'') because CDOs are 
collateralized by bank loans or by corporate or government fixed income 
securities, while ABS are collateralized by consumer and other loans 
(including student loans) made by non-bank lenders.\18\ Additionally, 
the Exchange states that the Fund's investments in CDOs would be 
subject to the Fund's liquidity procedures, and that the Fund's 
investment adviser does not expect that such investments would 
materially impact the liquidity of the Fund's investments.\19\
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    \16\ The Exchange defines CDOs as collateralized loan 
obligations (``CLOs'') and collateralized bond obligations 
(``CBOs''). The Exchange defines CLOs as securities issued by a 
trust or other special purpose entity that are collateralized by a 
pool of loans by U.S. banks and participations in loans by U.S. 
banks that are unsecured or secured by collateral other than real 
estate. The Exchange defines CBOs as securities issued by a trust or 
other special purpose entity that are backed by a diversified pool 
of fixed income securities issued by U.S. or foreign governmental 
entities or fixed income securities issued by U.S. or corporate 
issuers.
    \17\ See Notice, supra note 3, 84 FR at 12647-48.
    \18\ See id. at 12647, n.12.
    \19\ See id. at 12648.
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    With respect to the requirement that the Fund may invest only up to 
10% of its total assets in fixed income securities that do not satisfy 
the criteria of Commentary .01(b)(4), the Exchange proposes that the 
Fund's Private ABS/MBS (which may constitute up to 20% of the 
portfolio) and CDOs (which also may constitute up to 20% of the 
portfolio) would not count toward that 10% limit. As a result, up to 
50% of the Fund's fixed income securities might not satisfy the 
criteria in Commentary .01(b)(4). The Exchange argues that this 
alternative limit is appropriate because the criteria in Commentary 
.01(b)(4) ``do not appear to be designed for structured finance 
vehicles such as Private ABS/MBS.'' \20\
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    \20\ Id.
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    The Exchange proposes no other changes to the Shares' listing rule.

C. The Fund's Investments in CDOs

    In Amendment No. 1, the Exchange added information regarding the 
CDOs in which the Fund may invest. The Adviser and Subadviser represent 
that, with respect to the Fund's investments in CDOs (which, for 
purposes of this filing, include CBOs and CLOs), (1) the Fund will 
invest principally in the senior-most tranches of these securities, 
generally with an AAA investment rating which have first claim in the 
capital structure and generally have less sensitivity to the credit 
risk of the underlying assets (e.g., bank loans or commercial real 
estate); and (2) CDOs/CLOs represent about one quarter of the non-
agency securitized credit market and have issuances of about $793.9 
billion as of September 30, 2019.\21\ The Exchange states that the 
senior-most tranches provide investors with additional protections by 
distinguishing such investments from many of the attributes associated 
with the underlying assets and this credit enhancement provides the 
senior-most tranches ``loss absorption'' as credit losses from the 
collateral would be borne mainly by the more junior tranches.\22\ 
According to the Exchange, the relative lack of sensitivity to 
underlying credit exposure for senior CDO tranches allows market 
participants to more accurately assess current valuations, which may 
result in greater market liquidity.\23\
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    \21\ See Amendment No. 1, supra note 9, at 3.
    \22\ See id.
    \23\ See id.
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    The Adviser and Subadviser also represent that the senior-most CLO 
tranches generally make up at least 60% of the total amount issued in 
each securitization, and the Subadviser notes that the senior-most CLO 
tranches also make up most of the secondary trading volume for these 
securities.\24\ According to the Exchange, most investors in these 
tranches are institutional and professional investors (such as asset 
managers, insurance companies, pensions and money-center bank treasury 
offices), and transparency in the underlying collateral is robust as 
trustees and servicers generally must report holdings on a monthly 
basis.\25\ The Exchange also states that the underlying collateral 
(e.g., U.S. broadly-syndicated bank loans) for CLOs is actively traded 
throughout the day as most of the underlying collateral held by retail 
mutual funds also serves as the underlying collateral for CLOs and, 
because mutual funds must calculate a daily price for these 
investments, there is more readily available information for investors 
to establish a market price.\26\ According to the Exchange, the asset 
transparency along with the seniority of the CLO tranches tends to 
create more stable and predictable cash flows and, as a result, pricing 
can be more readily established and analyzed, including in volatile 
markets.\27\ Therefore, the Exchange asserts, the senior-most CLO 
tranches generally trade at tighter spreads even in times of market 
volatility.\28\
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    \24\ See id.
    \25\ See id.
    \26\ See id.
    \27\ See id.
    \28\ See id.
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    Additionally, the Adviser and Subadviser represent that the JPM CLO 
Index, which reflects recent total return performance across the CLO 
capital structure, provides a readily available indication of the 
amount of volatility (as measured by standard deviation) that CLOs have 
experienced and illustrates how large the ``drawdown'' (worst 12-month 
total return) has been in times of stress.\29\ In the Exchange's view, 
these two measures show significant differences in the stability of 
returns and the ``drawdown'' between the senior-most (``AAA CLO'') and 
the most junior tranches (``B CLO'').\30\ Additionally, the Adviser and 
Subadviser represent that, like the corporate credit market, the 
investment grade portions of the securitized credit market are 
generally more liquid than lower-rated securities, with ample price

[[Page 65208]]

discovery, while lower-rated securities are more volatile, with 
valuations that are more difficult to discern in times of market 
stress.\31\
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    \29\ See id.
    \30\ See id. at 3-4.
    \31\ See id. at 4.
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    Further, the Adviser and Subadviser represent that analysis of both 
data from the Trade Reporting and Compliance Engine of the Financial 
Industry Regulatory Authority and collateralized mortgage-backed 
securities (``CMBS'')/CLO spreads over time show how markets have 
behaved in past periods of volatility.\32\ The Exchange states that: 
(1) During the period from January 2012 through September 2019, CLO 
spread widening occurred during periods of broader market volatility; 
(2) there was a relatively high volume of CLOs trading in the secondary 
market, especially in the senior-most tranches; and (3) the spread 
moves were most pronounced in the junior tranches, while AAA CLOs did 
not experience a large spread move.\33\
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    \32\ See id.
    \33\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to continue listing and trading the Shares is consistent with 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\34\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\35\ which requires, among other things, that the Exchange's rules 
be designed 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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    \34\ In approving 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).
    \35\ 15 U.S.C. 78f(b)(5).
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    The Exchange proposes to modify the Fund's current limit on Private 
ABS/MBS to allow up to 40% of the Fund's portfolio to be composed of 
what had previously been defined as Private ABS/MBS. The Commission 
notes that it has previously approved listing rules which permit other 
series of Managed Fund Shares to hold private asset backed and 
mortgage-backed securities in excess of the levels permitted under 
Commentary .01(b)(5).\36\ The Commission also notes that it recently 
approved modifications to the listing rule of another issue of Managed 
Fund Shares, which included permitting that fund to hold up to 50% of 
its total assets in private asset-backed and mortgage-backed 
securities.\37\
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    \36\ See, e.g., Securities Exchange Act Release Nos. 84047 
(September 6, 2018), 83 FR 46200 (September 12, 2018) (SR-Nasdaq-
2017-128) (approving the listing and trading of shares of the 
Western Asset Total Return ETF); and 84826 (December 14, 2018), 83 
FR 65386 (December 20, 2018) (SR-NYSEArca-2018-25) (approving the 
continued listing and trading of shares of the Natixis Loomis Sayles 
Short Duration Income ETF).
    \37\ See Securities Exchange Act Release No. 87410 (October 28, 
2019), 84 FR 58750 (November 1, 2019) (SR-NYSEArca-2019-33).
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    The Exchange also proposes to allow up to 50% of the Fund's 
portfolio to be composed of fixed income securities which would not 
satisfy the criteria in Commentary .01(b)(4), in that: (1) Under the 
First Prior Order, the Fund may invest up to 10% of its total assets in 
fixed income securities that do not satisfy the criteria of Commentary 
.01(b)(4); and (2) the Fund's investments in Private ABS/MBS (which may 
constitute up to 20% of the portfolio) and CDOs (which also may 
constitute up to 20% of the portfolio) would not be required to satisfy 
the Commentary .01(b)(4) criteria. The Commission notes that it has 
previously approved the listing of other series of Managed Fund Shares 
with similar investment objectives and strategies without imposing 
requirements that a certain percentage of such funds' securities meet 
one of the criteria set forth in Commentary .01(b)(4).\38\
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    \38\ See, e.g., Securities Exchange Act Release No. 67894 
(September 20, 2012), 77 FR 59227 (September 26, 2012) (SR-BATS-
2012-033) (order approving the listing and trading of shares of the 
iShares Short Maturity Bond Fund); Securities Exchange Act Release 
No. 70342 (September 6, 2013), 78 FR 56256 (September 12, 2013) (SR-
NYSEArca-2013-71) (order approving the listing and trading of shares 
of the SPDR SSgA Ultra Short Term Bond ETF, SPDR SSgA Conservative 
Ultra Short Term Bond ETF, and SPDR SSgA Aggressive Ultra Short Term 
Bond ETF).
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    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act and the rules and regulations thereunder applicable 
to a national securities exchange.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NYSEArca-2019-14), as modified by 
Amendment No. 1, be, and it hereby is, approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25586 Filed 11-25-19; 8:45 am]
BILLING CODE 8011-01-P


