
[Federal Register Volume 88, Number 222 (Monday, November 20, 2023)]
[Notices]
[Pages 80783-80786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25546]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98933; File No. SR-CboeBZX-2023-062]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend the Initial Period After Commencement of 
Trading of a Series of ETF Shares on the Exchange as It Relates to the 
Holders of Record and/or Beneficial Holders, as Provided in Exchange 
Rule 14.11(l)

November 14, 2023.
    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 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the initial period after 
commencement of trading of a series of ETF Shares on the Exchange as it 
specifically relates to holders of record and/or beneficial holders 
under 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 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\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \6\ to determine

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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. 98497 (September 25, 
2023), 88 FR 67397 (September 29, 2023) (designating November 30, 
2023, as the date by which the Commission will either approve or 
disapprove, or institute proceedings to determine whether to 
disapprove, the proposed rule change). The Commission has received 
no comments on the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Description of the Proposal

    A continued listing requirement for ETF Shares \7\ 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, a series of ETF Shares for which there are fewer than 50 
beneficial holders for 30 or more consecutive trading days 
(``Beneficial Holders Rule'').\8\ 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 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.\9\
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    \7\ The term ``ETF Shares'' means shares of stock issued by an 
Exchange-Traded Fund. See BZX Rule 14.11(l)(3)(A). The term 
``Exchange-Traded Fund'' has the same meaning as the term 
``exchange-traded fund'' as defined in Rule 6c-11 under the 
Investment Company Act of 1940 (``1940 Act''). See BZX Rule 
14.11(l)(3)(B).
    \8\ See BZX Rule 14.11(l)(4)(B)(i)(c).
    \9\ Earlier, on April 29, 2020, the Exchange filed a proposed 
rule change to extend the Non-Compliance Period of the Beneficial 
Holders Rule applicable to Index Fund Shares, Managed Fund Shares, 
and ETF Shares from 12 to 36 months. The Commission disapproved that 
proposed rule change. See Securities Exchange Act Release No. 90819 
(December 29, 2020), 86 FR 332 (January 5, 2021).
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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''); \10\ (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.\11\
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    \10\ The Exchange notes that ETF Shares is a type of ETP.
    \11\ See Notice, 88 FR at 60517.
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    According to the Exchange, the ETP space is more competitive that 
it has ever been, with more than 2,000 ETPs listed on exchanges.\12\ As 
a result, distribution platforms have become more restrictive about the 
ETPs they will allow on their systems, often requiring a minimum 
existing track record (e.g., at least twelve months) and a minimum 
level of assets under management (e.g., at least $100 million).\13\ 
Many larger entities also require a one-year track record before they 
will invest in an ETP.\14\ In the Exchange's view, this has slowed the 
growth cycle of the average ETP and has resulted in a significant 
number of deficiencies with respect to satisfying the Beneficial 
Holders Rule over the last several years.\15\ Specifically, the 
Exchange notes that it has issued deficiency notifications to 39 ETPs 
for non-compliance with the Beneficial Holders Rule since 2015, 30 of 
which ultimately were able to achieve compliance after the deficiency 
notice was issued.\16\
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    \12\ See id.
    \13\ See id.
    \14\ See id.
    \15\ See id.
    \16\ See id.
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    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.\17\ 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.\18\ 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.\19\
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    \17\ See id. at 60518.
    \18\ See id.
    \19\ See id.
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    Finally, the Exchange states that the proposal ``does not create 
any significant change in the risk of manipulation for ETF Shares 
listed on the exchange.'' \20\ The Exchange points out that the 
Beneficial Holders Rule does not apply during the first 12 months that 
an issue of ETF Shares is listed on the Exchange. Therefore, according 
to BZX, ``[a]ny 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.'' \21\ 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 and 
other entities of the Intermarket Surveillance Group.\22\ The Exchange 
believes that ``these robust surveillance procedures successfully 
mitigated manipulation concerns during an ETPs first 12 months of 
listing on the Exchange, during which there is currently no Beneficial 
Holder requirement,'' and that ``these surveillance procedures will act 
to mitigate any manipulation concerns that arise from extending the 
compliance period for the Beneficial Holders Rules from 12 months to 36 
months.'' \23\ Lastly, the Exchange asserts that other continued 
listing standards (the disclosure obligations applicable under Rule 6c-
11 of the 1940 Act for series of ETF Shares) ``are generally sufficient 
to mitigate manipulation concerns associated with ETF Shares.'' \24\
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    \20\ Id.
    \21\ Id.
    \22\ See id.
    \23\ Id.
    \24\ Id.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2023-062 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \25\ 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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    \25\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\26\ 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

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permit unfair discrimination between customers, issuers, brokers, or 
dealers.'' \27\
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    \26\ Id.
    \27\ 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.\28\
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    \28\ 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 a series of 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 emphasizes 
that some ETPs have had difficulty complying with the Beneficial 
Holders Rule. The Exchange indicates that non-compliance 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.
    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. The Exchange does not 
explain why the manipulation and other regulatory risks would not be 
greater with a very small number of beneficial holders, and 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 states that no new manipulation concerns would arise with 
a longer Non-Compliance Period than a shorter one, and that existing 
surveillances and other listing standards sufficient to mitigate 
manipulation concerns for 12 months are sufficient for 36 months,\29\ 
but does not explain in any detail the basis for this view,\30\ or the 
impact of its proposal on the maintenance of fair and orderly markets 
or other applicable Exchange Act standards.
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    \29\ See Notice, 88 FR at 60518.
    \30\ Specifically, BZX does not discuss why it believes that 
existing surveillance procedures ``successfully mitigated 
manipulation concerns'' during the first 12 months after listing.
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    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\
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    \31\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \32\ 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.

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, and 
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.\33\
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    \33\ 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 proposed rule change should be approved 
or disapproved by December 11, 2023. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 26, 2023.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CboeBZX-2023-062 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-2023-062. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the

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Exchange. Do not include personal identifiable information in 
submissions; you should submit only information that you wish to make 
available publicly. We may redact in part or withhold entirely from 
publication submitted material that is obscene or subject to copyright 
protection. All submissions should refer to file number SR-CboeBZX-
2023-062 and should be submitted on or before December 11, 2023. 
Rebuttal comments should be submitted by December 26, 2023.
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    \34\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-25546 Filed 11-17-23; 8:45 am]
BILLING CODE 8011-01-P


