[Federal Register Volume 87, Number 86 (Wednesday, May 4, 2022)]
[Notices]
[Pages 26378-26380]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-09519]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94814; File No. SR-NYSE-2022-04]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend Rules 5P, 5.2(j)(8)(e), 8P, and 98

April 28, 2022.
    On January 14, 2022, New York Stock Exchange LLC (``Exchange'' or 
``NYSE'') 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 permit the listing and trading of certain 
exchange-traded products (``ETPs'') that overlie one or more NMS Stocks 
listed on the Exchange. The proposed rule change was published for 
comment in the Federal Register on January 31, 2022.\3\ On March 9, 
2022, 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 no comment letters on the proposal. This order 
institutes proceedings under Section 19(b)(2)(B) of the Act \6\ to 
determine whether to approve or disapprove the proposed rule change.
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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. 94053 (Jan. 25, 
2022), 87 FR 4982 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 94392, 87 FR 14592 
(Mar. 15, 2022). The Commission designated May 1, 2022 as the date 
by which it should approve or disapprove, or institute proceedings 
to determine whether to disapprove, the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary Description of the Proposal \7\
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    \7\ For a complete description of the proposed rule change, see 
Notice, supra note 3.
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    The Exchange proposes to amend its rules regarding side-by-side 
trading, which is the trading of an equity

[[Page 26379]]

security and its related derivative product at the same physical 
location. Specifically, the Exchange proposes to exclude from its 
listing prohibitions in NYSE Rules 5P and 8P \8\ shares of an ETP that 
independently satisfies the quantitative generic listing criteria set 
forth in NYSE Rules 5.2(j)(3), Supplementary Material .01(a), NYSE Rule 
5.2(j)(6)(B)(I); or proposed Rule 5.2(j)(8)(e)(1)(B), as well as shares 
of an ETP that independently satisfies the generic listing criteria set 
forth in NYSE Rules 8.100, Supplementary Material .01(a)(A) or 8.600, 
Supplementary Material .01(a).\9\
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    \8\ NYSE Rules 5P and 8P generally prohibit the Exchange from 
listing shares of an ETP that ``has any component NMS Stock that is 
listed on the Exchange or that is based on, or represents an 
interest in, an underlying index or reference asset that includes an 
NMS Stock listed on the Exchange. NMS Stock is defined in Rule 600 
of Regulation NMS, 17 CFR 242.600(b)(48) as ``any NMS security other 
than an option.'' ``NMS Security'' means any security or class of 
securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting 
plan, or an effective national market system plan for reporting 
transactions in listed options.'' 17 CFR 242.600(b)(47). ``NMS 
Security'' refers to ``exchange-listed equity securities and 
standardized options, but does not include exchange-listed debt 
securities, securities futures, or open-end mutual funds, which are 
not currently reported pursuant to an effective transaction 
reporting plan.'' See Question 1.1 in the ``Responses to Frequently 
Asked Questions Concerning Large Trader Reporting,'' available at: 
https://www.sec.gov/divisions/marketreg/large-trader-faqs.htm.
    \9\ Shares of Active Proxy Portfolio Shares and Managed 
Portfolio Shares, which are issued by funds whose portfolios are not 
fully transparent, already are exempted from the general 
prohibition. See NYSE Rule 8P.
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    The Commission previously approved integrated market making and 
side-by-side trading for ``broad-based'' exchange traded funds, Trust-
Issued Receipts, and related options.\10\ According to the Exchange, 
under Commission precedent, (1) integrated market making and side-by-
side trading in both the ETP and related options is permissible--with 
no additional requirement for information barriers or physical or 
organizational separation--where the ETP is ``broad-based,'' i.e., not 
readily susceptible to manipulation; (2) an ETP is broad-based when its 
the individual components are sufficiently liquid and well-capitalized 
and the product is not over-concentrated; and (3) to determine whether 
an ETP is broad-based, the Commission has relied on an exchange's 
listing standards.\11\ In support of its proposal, the Exchange 
analyzes aspects of its existing--and in the case of Exchange-Traded 
Fund Shares, its proposed--listing criteria for shares of the specified 
ETPs and concludes that they are sufficiently ``broad-based'' to 
address potential manipulation concerns arising out of trading those 
shares on the same physical trading floor as one or more underlying 
NYSE-listed securities.\12\
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    \10\ See Securities Exchange Act Release No. 46213, 67 FR 48232 
(SR-Amex-2002-21); see also Securities Exchange Act Release No. 
62479 (July 9, 2010), 75 FR 41264 (July 15, 2010) (SR-Amex-2010-31) 
(approving side-by-side trading and integrated market making in the 
QQQ ETF and certain of its component securities where the QQQs met 
the composition and concentration measures to be classified as a 
broad-based ETF).
    \11\ See Notice, supra note 3, 87 FR at 4983.
    \12\ See id., 87 FR at 4984-85
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    The Exchange also proposes to amend a rule regarding integrated 
market making,\13\ which is the practice of the same person or firm 
making markets in an equity security and its related derivative 
product. NYSE assigns each of securities it lists to a Designated 
Market Maker (``DMM''), and trading is on the floor of the Exchange. 
Integrated market making could be implicated if NYSE starts listing 
ETPs with an underlying NYSE Component Security because each ETP would 
be assigned to a DMM and that DMM also may be assigned one or more NYSE 
Component Securities that underlie the ETP's underlying index or 
portfolio. The Exchange proposes to narrow the definition of ``related 
products'' to exclude derivative instruments that overlie ETPs listed 
under NYSE Rules 5.2(j)(3), Supplementary Material .01(a); 
5.2(j)(6)(B)(I); 5.2(j)(8)(e)(1)(B); 8.100, Supplementary Material 
.01(a)(A); 8.600 Supplementary Material .01(a); 8.601; or 8.900.
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    \13\ Current NYSE Rule 98(c)(6) prohibits DMM units from 
operating as a specialist or market maker on the Exchange in 
``related products'' unless specifically permitted in Exchange 
rules.
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    While informational advantage is a concern with respect to 
integrated market making,\14\ the Exchange asserts that there are 
sufficient safeguards in place to prohibit the misuse of material 
nonpublic information by a member organization that operates a DMM 
unit. Specifically, the Exchange asserts that Rule 98 contains narrowly 
tailored restrictions to address that DMMs while on the floor may have 
access to certain floor-based non-public information and requires DMM 
units to maintain procedures and controls to prevent the misuse of 
material, non-public information that are effective and appropriate for 
that member organization.\15\
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    \14\ See Securities Exchange Act Release No. 46213, supra note 
10, 67 FR at 48235.
    \15\ See id., 87 FR at 4986.
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    According to the Exchange, trading on the Exchange is subject to a 
comprehensive regulatory program that includes a suite of surveillances 
and routine examinations that review trading by DMMs and other market 
participants on the Exchange's trading floor, including surveillances 
designed to monitor for trading ahead and manipulative activity.\16\ To 
assist Exchange surveillance of DMM trading activity, a member 
organization operating a DMM unit must daily provide the Exchange with 
net position information in DMM securities by the DMM unit and any 
independent trading unit of which it is part for such times and in the 
manner prescribed by the Exchange pursuant to Rule 98(c)(5).\17\ In 
addition, routine examinations are conducted consistent with the 
current exam-based regulatory program associated with Rule 98 that 
reviews member organizations operating DMM units for compliance with 
the above-described policies and procedures to protect against the 
misuse of material nonpublic information.\18\ Lastly, the Exchange 
asserts that DMM market making activity is not materially different 
from market making on other exchanges and that these existing programs 
are reasonably designed to address any concerns that may be raised by 
the trading of the specified listed ETPs that have underlying NYSE 
Component Securities.\19\
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    \16\ See id., 87 FR at 4987.
    \17\ See id.
    \18\ See id.
    \19\ See id.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-NYSE-
2019-54 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \20\ 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. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \20\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\21\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section

[[Page 26380]]

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,'' and ``to protect investors and the public 
interest.'' \22\
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    \21\ Id.
    \22\ 15 U.S.C. 78f(b)(5).
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    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. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views.
    1. What are commenters' views generally on whether the Exchange's 
proposal to implement side-by-side trading and integrated market making 
for certain ETPs to be listed and traded on the Exchange is consistent 
with Section 6(b)(5) of the Act, which requires that the Exchange's 
rules be designed to, among other things, prevent fraudulent and 
manipulative acts and practices?
    2. Do the quantitative generic listing criteria of current Rules 
5.2(j)(3), Supplementary Material .01(a) (applicable to Investment 
Company Units), 5.2(j)(6)(B)(I) (applicable to Equity Index-Linked 
Securities), and proposed Rule 5.2(j)(8), as well as the generic 
listing criteria of current NYSE Rules 8.100 (applicable to Portfolio 
Depositary Receipts) and 8.600 (applicable to Managed Fund Shares) 
adequately address the concerns reflected in the ``broad-based'' test 
previously articulated by the Commission with respect to side-by-side 
trading and integrated market making? \23\ If not, why? Should the 
Commission consider other factors in reviewing side-by-side trading and 
integrated market making?
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    \23\ See supra note 10.
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    3. What are commenters' views about whether the proposed changes to 
Rule 98 to exclude the specified ETPs listed on the Exchange from the 
definition of ``related products'' would remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system? Do commenters agree that such changes would facilitate the 
assignment of listed ETPs, including ETPs with underlying NYSE 
Component Securities that meet the specified listing rules in Rules 5P 
and 8P, to DMMs and permit DMMs to trade such listed ETPs consistent 
with existing Rules governing DMM trading? If so, why? If not, why not?
    4. What informational advantage (if any) over other market 
participants with respect to trading an ETP or its underlying 
securities might a DMM (or other member) obtain as a result of the 
proposed implementation of side-by-side trading and integrated market 
making for ETPs with underlying NYSE Component Securities? What 
concerns, if any, do commenters have about the potential for a DMM (or 
other member) to misuse material, non-public information?

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, 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.\24\
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    \24\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 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 May 25, 2022. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 8, 
2022. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, 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 [email protected]. Please include 
File Number SR-NYSE-2022-04 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-2022-04. 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-2022-04 and should be submitted by 
May 25, 2022. Rebuttal comments should be submitted by June 8, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-09519 Filed 5-3-22; 8:45 am]
BILLING CODE P


