[Federal Register Volume 86, Number 78 (Monday, April 26, 2021)]
[Notices]
[Pages 22080-22082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-08566]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91618; File No. SR-NYSE-2021-20]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending Section 102.04 of the 
NYSE Listed Company Manual To Establish Limits on Investments in 
Unregistered Investment Vehicles by Listed Closed End Funds

April 20, 2021.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on April 9, 2021, New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Section 102.04 of the NYSE Listed 
Company Manual (``Manual'') to establish limits on investments in 
unregistered investment vehicles by listed closed end funds. The 
proposed rule change is available on the Exchange's website at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange will generally authorize the listing of a closed-end 
management investment company (a ``Fund'') registered under the 
Investment Company Act of 1940 (the ``Investment Company Act'') 
pursuant to the provisions of Section 102.04(A) of the Manual. Section 
102.04(A) does not include any explicit restrictions on the kinds of 
investments a listed Fund may include in its portfolio. The Exchange 
proposes to amend Section 102.04(A) to provide for a limited ability of 
listed Funds to invest in private fund vehicles that are not themselves 
registered under the Investment Company Act, including alternative 
asset classes such as hedge funds and private equity funds. The SEC has 
amended its own rules with respect to mutual funds to formally 
establish permitted levels of investments by mutual funds in illiquid 
investment categories. The longstanding guidance from SEC staff has 
been that mutual funds should not exceed a 15% limitation on illiquid 
investments, including private funds. In 2016, the Commission adopted 
Investment Company Act Rule 22e-4(b)(1)(iv) to codify this policy.\4\ 
In light of this development in the SEC's regulation of mutual funds 
and the continuing interest demonstrated by issuers, the Exchange now 
proposes to amend Section 102.04(A) to provide for a limited ability of 
Funds to invest in private funds.
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    \4\ 17 CFR 270.22e-4(b)(1)(iv).
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    The proposed amendment to Section 102.04(A) of the Manual would 
include a new definition of ``Private Funds.'' A ``Private Fund'' for 
purposes of Section 102.04(A) as amended would mean (1) in the case of 
an entity organized under the laws of the United States or any state 
therein, a limited partnership, limited liability company, trust, 
corporation or similar incorporated or unincorporated entity that would 
be an investment company under Section 3(a) of the Investment Company 
Act but for the exception provided from that definition by either 
Sections 3(c)(1) or 3(c)(7) of the Investment Company Act and (2) in 
the case of an entity not organized under the laws of the United States 
or any state, an entity that is only permitted to offer its securities 
in the United States in a private offering that complies with Section 
7(d) and either 3(c)(1) or 3(c)(7) of the Investment Company Act and 
the interpretations of the SEC thereunder.
    The Exchange proposes to exclude from the definition of Private 
Funds any funds that are issuers of collateralized debt obligations 
(``CDOs'') or collateralized loan obligations (``CLOs''). The issuers 
of CDOs and CLOs are private investment vehicles not registered under 
the Investment Company Act, and differ from hedge funds and private 
equity funds in material respects. Most importantly, there is an active 
secondary trading market for CDOs and CLOs and there are services that 
report trading prices for those markets. As a result, there is a 
significant degree of transparency in the valuation of CDOs and CLOs, 
as the market typically values them based on general market prices for 
debt issuances with the same credit rating and seniority as the 
tranches included in the specific CDO or CLO. Considering the greater 
liquidity and transparency of CDOs and CLOs, the Exchange proposes to 
exclude investments in those asset classes from its definition of 
Private Funds and, thus, does not propose to apply to CDOs and CLOs the 
proposed limits on listed Funds' investments in Private Funds.
    Accordingly, the Exchange proposes that a ``Private Fund'' not 
include any entity that meets the following requirements:
    (i) The entity is engaged in the business of purchasing, or 
otherwise acquiring, and holding Eligible Assets (as defined below) 
(and in activities related or incidental thereto);
    (ii) all securities issued by the entity are either (A) initially 
sold to qualified institutional buyers as defined in Rule 144A under 
the Securities Act or to persons involved in the organization or 
operation of the issuer or an affiliate, as defined in Rule 405 under 
the Securities Act, of such a person or (B) fixed-income securities or 
other securities which entitle their holders to receive payments that 
depend primarily on the cash flow from Eligible Assets;
    (iii) the entity appoints a trustee that meets the requirements of 
Section 26(a)(1) of the Investment Company Act and that is not 
affiliated, as defined in Rule 405 under the Securities Act, with such 
entity or with any person involved in the organization or operation of 
such entity, which does not offer or provide credit or credit 
enhancement to such entity and that executes an agreement or instrument 
concerning such entity's

[[Page 22081]]

securities containing provisions to the effect set forth in Section 
26(a)(3) of the Investment Company Act;
    (iv) the entity takes reasonable steps to cause the trustee to have 
a perfected security interest or ownership interest valid against third 
parties in those Eligible Assets that principally generate the cash 
flow needed to pay the fixed-income security holders, provided that 
such assets otherwise required to be held by the trustee may be 
released to the extent needed at the time for the operation of the 
issuer; and
    (v) the entity takes actions necessary for the cash flows derived 
from Eligible Assets for the benefit of the holders of fixed-income 
securities to be deposited periodically in a segregated account that is 
maintained or controlled by the trustee consistent with the rating (if 
any) of the outstanding fixed-income securities.
    ``Eligible Assets'' means financial assets, either fixed or 
revolving, that by their terms convert into cash within a finite time 
period plus any rights or other assets designed to assure the servicing 
or timely distribution of proceeds to security holders.
Proposed Limitations on Investments in Private Funds
    Under the proposed amended form of Section 102.04(A), the Exchange 
would not authorize the initial listing of any Fund where, at the time 
of original listing
    (A) Private Funds on an aggregated basis represent more than 15% of 
the Fund's net assets
    (B) any single Private Fund represents more than 5% of the Fund's 
net assets; or
    (C) the Fund invests or intends to invest in Private Funds and has 
not adopted and does not maintain fundamental policies (as such term is 
used in the Investment Company Act of 1940) providing that:
    (i) Such Fund may not at any time make an additional investment in 
a Private Fund if, immediately after giving effect to such investment, 
Private Funds would represent more than 15% of such Fund's net assets 
or such individual Private Fund would represent more than 5% of such 
Fund's net assets; and
    (ii) if at any time such Fund (a) holds more than 15% of its net 
assets in Private Funds or (b) violates its fundamental policy 
prohibiting any additional investment in a Private Fund such that, 
immediately after giving effect to such investment, such individual 
Private Fund would represent more than 5% of such Fund's net assets:
     The Fund must immediately inform the Exchange of such 
occurrence and publicly disclose such occurrence in a manner consistent 
with the Exchange's immediate release policy as set forth in Sections 
202.05 and 202.06 of the Manual;
     management must report such an occurrence to the Fund's 
board of directors within one business day of the occurrence, with an 
explanation of the extent and causes of the occurrence, and how the 
Fund plans, as the case may be, to (i) reduce its investments in 
Private Funds to no more than 15% of its net assets within a reasonable 
period of time, or (ii) reduce its investment in the individual Private 
Fund with respect to which it has exceeded the ownership interest 
permitted by the applicable fundamental policy to a level no greater 
than its ownership interest immediately prior to the transaction giving 
rise to such condition, in each case within a reasonable period of 
time; and
     if the amount, as the case may be, of (i) the Fund's 
investments in Private Funds is still above 15% of its net assets, or 
(ii) the Fund's investment in the individual Private Fund with respect 
to which it has exceeded the investment limit of its fundamental policy 
is still above its ownership interest immediately prior to the 
transaction giving rise to such condition, in each case 30 days from 
the occurrence (and at each consecutive 30 day period thereafter), the 
Fund's board of directors, including a majority of directors who are 
not interested persons (as such term is defined in Section 2(a)(19) of 
the Investment Company Act of 1940) of the Fund, must assess whether 
the plan presented to it pursuant to the requirements set forth above 
continues to be in the best interest of the Fund.
    Any listed Fund in good standing may commence investing in Private 
Funds, but may do so only if it first adopts the required fundamental 
policies described above. The Fund must consult with the Exchange 
before taking this action. Any such Fund will also be subject to the 
ongoing requirements with respect to investments in Private Funds set 
forth above.
    Today Exchange rules do not restrict the investment by listed Funds 
in Private Funds. The proposed amendment to Section 102.04(A) would 
amend the Exchange's listing rules to restrict the investment by Funds 
in Private Funds, such as hedge funds and private equity funds, which 
are illiquid and consequently difficult to value. The Exchange notes 
that the SEC has addressed identical concerns about the inclusion of 
illiquid asset classes in mutual fund portfolios by adopting a rule 
imposing a 15% limitation on the acquisition of such assets by mutual 
funds. By adopting an identical restriction for listed Funds, the 
Exchange believes that it is similarly appropriately addressing these 
concerns for listed Funds. Furthermore, the Exchange notes that its own 
proposal goes further than the restriction the SEC has imposed upon 
mutual funds by also requiring a diversification in any listed Fund's 
holdings of Private Funds. The Exchange believes that the proposed 5% 
limitation on any individual Private Fund investment would limit the 
materiality of any individual Private Fund investment with respect to 
the Fund portfolio as a whole and that this provision provides a 
significant additional protection for investors in listed Funds over 
and above the protection provided to mutual fund investors by the 
comparable rule under the Investment Company Act.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\5\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\6\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest. The 
Exchange believes that the proposal protects investors and the public 
interest because it strictly limits both the aggregate investment by 
listed Funds in Private Funds and the percentage any individual Private 
Fund investment may represent in a listed Fund's portfolio. The 
Exchange believes that these restrictions appropriately address 
concerns about the illiquidity of Private Fund investments by limiting 
the materiality of Private Fund investments to a listed Fund's 
portfolio both in the aggregate and for any individual Private Fund 
investment. The Exchange notes that the 15% aggregate investment limit 
in the proposal is the same as the limit applied by the SEC to mutual 
funds under Investment Company Act rules, while the 5% limit on 
individual investments in the proposal is an augmentation of the SEC's 
limitations with respect to mutual funds. The Exchange believes that it 
is consistent with the protection of investors and the public interest 
to exempt CDOs and CLOs from these

[[Page 22082]]

restrictions, as there is a more active trading market for CDOs and 
CLOs than for Private Funds and there is more consistency and 
transparency in valuing them.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The purpose of the proposal 
is to enhance competition by providing a listing market for Funds that 
wish to have the ability to invest in Private Funds, while 
appropriately restricting Funds in pursuing that strategy to protect 
investors. The proposed amendment would not impose any burden on 
competition between newly-listed Funds and those that are already 
listed, as currently-listed Funds that are in good standing would be 
eligible to invest in Private Funds on the same terms as newly-listed 
Funds. Other listing venues can adopt similar rules if they so desire. 
As such, the Exchange does not believe that the proposal imposes any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or up to 90 days (i) as the Commission may designate 
if it finds such longer period to be appropriate and publishes its 
reasons for so finding or (ii) as to which the self-regulatory 
organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-NYSE-2021-20 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-NYSE-2021-20. 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-NYSE-2021-20 and should be submitted on 
or before May 17, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-08566 Filed 4-23-21; 8:45 am]
BILLING CODE 8011-01-P


