[Federal Register Volume 85, Number 154 (Monday, August 10, 2020)]
[Notices]
[Pages 48318-48320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17353]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89472; File No. SR-CboeBZX-2020-036]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether to Approve or Disapprove a 
Proposed Rule Change Relating to Rule 14.11, Other Securities, To 
Modify a Continued Listing Criterion for Certain Exchange-Traded 
Products

August 4, 2020.
    On April 29, 2020, 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 one of the continued 
listing requirements relating to certain exchange-traded products 
(``ETPs'') under BZX Rule 14.11. The proposed rule change was published 
for comment in the Federal Register on May 7, 2020.\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. 88795 (May 1, 2020), 
85 FR 27254 (``Notice'').
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    On June 16, 2020, 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 one comment letter on the 
proposed rule change.\6\ The Commission is issuing this order to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Act \7\ to 
determine whether to approve or disapprove the proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89076, 85 FR 37488 
(June 22, 2020). The Commission designated August 5, 2020 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ Comments on the proposed rule change can be found on the 
Commission's website at: https://www.sec.gov/comments/sr-cboebzx-2020-036/srcboebzx2020036.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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I. Description of the Proposal

    A continued listing requirement for certain ETPs \8\ 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, shares of such ETPs for which there are fewer than 50 
beneficial holders for 30 or more consecutive trading days 
(``Beneficial Holder Rule''). The Exchange is proposing to change the 
date after which an ETP 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.
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    \8\ For purposes of the proposal, the term ``ETP'' means 
securities listed pursuant to BZX Rule 14.11(c) (Index Fund Shares), 
BZX Rule 14.11(i) (Managed Fund Shares), and BZX Rule 14.11(l) 
(Exchange-Traded Fund Shares (``ETF Shares'')).
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A. The Exchange's Rationale

    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 ETP; (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.
    According to the Exchange, the ETP space is more competitive that 
it has ever been, with more than 2000 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 notes that it has issued 
deficiency notifications to 34 ETPs for non-compliance with the 
Beneficial Holders Rule in the last five years, 27 of which ultimately 
were able to achieve compliance while going through the delisting 
process.
    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. 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 69 products voluntarily delist in the 
last two years. 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.
    Finally, the Exchange states that the proposal ``does not create 
any significant change in the risk of manipulation for ETPs listed on 
the exchange.'' The Exchange ``does not believe there is anything 
particularly important about the 50th Beneficial Holder that reduces 
the manipulation risk associated with an ETP as compared to the 49th, 
nor is there any manipulation concern that arises on the 366th day 
after an ETP began trading on the Exchange that didn't otherwise exist 
on the 1st, 2nd, or 365th day.'' \9\ 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 ``these 
robust surveillance procedures will further act to mitigate concerns 
that arise from extending the compliance period for the Beneficial 
Holders [Rule] from 12 months to 36 months.'' \10\ Lastly, the Exchange 
takes the position that other continued listing standards (e.g., with 
respect to the diversity, liquidity and size of an ETP's holdings or 
reference assets) ``are generally sufficient to mitigate manipulation 
concerns associated with the applicable ETP.'' \11\
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    \9\ See Notice, supra note 3, 85 FR at 27256.
    \10\ See id.
    \11\ See id.

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[[Page 48319]]

B. Comment on the Proposed Rule Change

    The Commission received one comment in support of the proposal.\12\ 
The commenter states that the beneficial owner requirement 
disproportionately punishes smaller companies without the resources to 
pay for aggressive distribution, and disincentivizes issuers from 
launching funds that can prove themselves purely by investment merit 
over the long term.\13\ The commenter believes that the purpose of the 
beneficial holder minimum likely is to enforce some sort of minimum 
liquidity, and accordingly suggests alternative liquidity measures such 
as the quality of secondary markets (e.g., spreads and depth of book), 
the liquidity of the underlying basket, and the number of potential 
liquidity providers. In this commenter's view, increasing the time 
period to achieve the minimum number of beneficial holders is a 
positive step, but eliminating the requirement altogether would be far 
more purposeful.\14\
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    \12\ See Letter to Secretary, Commission, from S Phil Bak, 
Founder & CEO, SecLenX (May 13, 2020) (``SecLenX Letter'').
    \13\ See id. at 1.
    \14\ See id. at 2.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2020-036 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \15\ 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.
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    \15\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\16\ 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 permit unfair discrimination 
between customers, issuers, brokers, or dealers.'' \17\
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    \16\ Id.
    \17\ 15 U.S.C. 78f(b)(5).
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    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.\18\
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    \18\ 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).
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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 an ETP 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 noncompliance 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. With respect to regulatory considerations, the 
Exchange takes the position that the manipulation risk would not be 
materially greater if an ETP had 49 beneficial holders as opposed to 
50, and that no new manipulation concerns would arise with a longer 
Non-Compliance Period than a shorter one. The Exchange also asserts 
that existing surveillances and other listing standards are sufficient 
to mitigate manipulation concerns.
    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. For example, the Exchange 
states that the manipulation risk is not materially greater with 49 
beneficial holders than with 50, but the Exchange is proposing to 
require no minimum number during the Non-Compliance Period, and does 
not explain why the manipulation and other regulatory risks would not 
be greater with a very small number of beneficial holders. The Exchange 
also states that no new manipulation concerns would arise with a longer 
Non-Compliance Period than a shorter one, but does not explain 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. The Exchange takes the position that existing surveillances and 
other listing standards are sufficient to mitigate manipulation 
concerns, but does not explain in any detail the basis for this view, 
or the impact of its proposal on the maintenance of fair and orderly 
markets or other applicable Exchange Act standards.
    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.'' 
\19\ 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.\20\
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    \19\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \20\ See id.
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    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.

[[Page 48320]]

IV. Commission's Solicitation of 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.\21\
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    \21\ 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).
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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 August 31, 2020. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 14, 2020. 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.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CboeBZX-2020-036 on the subject line.

Paper Comments

     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-2020-036. 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 (http://www.sec.gov/rules/sro.shtml). 
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-CboeBZX-2020-036 and should be submitted 
by August 31, 2020. Rebuttal comments should be submitted by September 
14, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17353 Filed 8-7-20; 8:45 am]
BILLING CODE 8011-01-P


