Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Amendment No. 4 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 4, To Adopt Nasdaq Rule 5704 Governing the Listing and Trading of Exchange Traded Fund Shares, 19984-19994 [2020-07440]
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19984
Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Notices
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–CboeEDGA–2020–010 and
should be submitted on or before April
30, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–07432 Filed 4–8–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88561; File No. SR–
NASDAQ–2019–090]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Amendment No. 4 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment No. 4, To Adopt Nasdaq
Rule 5704 Governing the Listing and
Trading of Exchange Traded Fund
Shares
April 3, 2020.
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On November 8, 2019, The Nasdaq
Stock Market LLC (‘‘Exchange’’ or
‘‘Nasdaq’’) filed with the Securities and
Exchange Commission (‘‘Commission’’
or ‘‘SEC), 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, among other
things, adopt new Nasdaq Rule 5704 to
list and trade Exchange Traded Fund
Shares. The proposed rule change was
published for comment in the Federal
Register on November 22, 2019.3
On December 17, 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 disapprove the
proposed rule change.5 On February 6,
2020, the Exchange filed Amendment
No. 1 to the proposed rule change,
18 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 87559
(November 18, 2019), 84 FR 64574.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 87776,
84 FR 70610 (December 23, 2019).
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which amended and replaced the
proposed rule change in its entirety.6
On February 20, 2020, the Commission
published the proposed rule change, as
modified by Amendment No. 1, for
notice and comment and instituted
proceedings to determine whether to
approve or disapprove the proposed
rule change, as modified by Amendment
No. 1.7 On March 3, 2020, March 17,
2020, and March 19, 2020, the Exchange
filed Amendments No. 2, No. 3, and No.
4 to the proposed rule change,
respectively.8 The Commission has
received no comment letters on the
proposed rule change.
The Commission is publishing this
notice to solicit comments on
Amendment No. 4 to the proposed rule
change from interested persons, and is
approving the proposed rule change, as
modified by Amendment No. 4, on an
accelerated basis.
I. Exchange’s Description of the
Proposal, as Modified by Amendment
No. 4
The Exchange proposes to adopt new
Nasdaq Rule 5704 to list and trade
shares of securities issued by an
exchange-traded fund as defined herein,
as well as amendments to Nasdaq Rule
4120 (Limit Up-Limit Down Plan and
Trading Halts) and Nasdaq Rule 5615
(Exemptions from Certain Corporate
Governance Requirements), Nasdaq
Rule 5705(b) (Index Fund Shares),
Nasdaq Rule 5735 (Managed Fund
Shares), and to discontinue the
quarterly reports currently required
with respect to Managed Fund Shares
under Nasdaq Rule 5735(b). This
Amendment No. 4 replaces and
supersedes the original filing and
Amendments No. 1, No. 2 and No. 3 in
their entirety.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaq.cchwallstreet.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
Exchange included statements
concerning the purpose of, and basis for,
6 See
infra note 8.
Securities Exchange Act Release No. 88207
(February 13, 2020), 85 FR 9879.
8 Each of Amendments No. 2, 3, and 4 amended
and replaced the proposed rule change, as modified
by the prior amendment, in its entirety. All
amendments to the proposed rule change are
available on the Commission’s website at: https://
www.sec.gov/comments/sr-nasdaq-2019-090/
srnasdaq2019090.htm.
7 See
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the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
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 aspects 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 proposes Nasdaq Rule
5704 to establish generic listing
standards that permit the listing and
trading of shares (‘‘Exchange Traded
Fund Shares’’) of exchange-traded funds
(‘‘ETFs’’ as defined below) that meet the
criteria established by the Commission
in its adoption of Rule 6c–11 9 (‘‘Rule
6c–11’’) under the Investment Company
Act of 1940, as amended (‘‘1940 Act’’),
to operate without obtaining an
exemptive order from the SEC under the
1940 Act.10 This will help to
accomplish the SEC’s goal in adopting
Rule 6c–11 to allow such ETFs to come
directly to market without the cost and
delay of obtaining exemptive relief
while still protecting the interests of
investors and other market participants.
Rule 6c–11 will provide exemptions
applicable to both index-based and
transparent actively managed ETFs.
Rule 6c–11 will enhance the regulatory
framework through streamlining
existing procedures and reducing the
costs and time frames associated with
bringing ETFs to market. This, in turn,
will also serve to enhance competition
among ETF issuers and ultimately
reduce investor costs.11
9 Specifically, Rule 6c–11 applies to open-end
funds that (i) issue and redeem creation units to and
from authorized participants in exchange for a
basket of securities and other assets (and any cash
balancing amount), and (ii) whose shares are listed
on a national securities exchange and trade at
market-determined prices. Rule 6c-11 does not
apply to leveraged, inverse, non-transparent, share
classes, or exchange-traded funds structured as unit
investment trusts.
10 See Release No. 33–10695; IC–33646; File No.
S7–15–18 (Exchange-Traded Funds) (September 25,
2019), 84 FR 57162 (October 24, 2019) (‘‘Adopting
Release’’).
11 The SEC said in the Adopting Release that Rule
6c–11 ‘‘will modernize the regulatory framework for
ETFs to reflect our more than two decades of
experience with these investment products. The
rule is designed to further important Commission
objectives, including establishing a consistent,
transparent, and efficient regulatory framework for
ETFs and facilitating greater competition and
innovation among ETFs.’’ See Adopting Release at
57163. The SEC also said that in reference to the
impact of Rule 6c–11 that: ‘‘We believe rule 6c–11
will establish a regulatory framework that: (1)
Reduces the expense and delay currently associated
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Nasdaq believes that the proposed
generic listing rules for Exchange
Traded Fund Shares, described below,
will facilitate efficient procedures for
ETFs that are permitted to operate in
reliance on Rule 6c–11. The Exchange
also believes that proposed Nasdaq Rule
5704 is consistent with, and will
further, the Commission’s goals in
adopting Rule 6c–11. Exchange Traded
Fund Shares that are permitted to
operate in reliance on Rule 6c–11 will
be permitted to be listed and traded on
the Exchange without a prior
Commission approval order or notice of
effectiveness pursuant to Section 19(b)
of the Act. This will significantly reduce
the time frame and costs associated with
bringing Exchange Traded Fund Shares
to market, which, in turn, will promote
competition among issuers of Exchange
Traded Fund Shares, to the benefit of
investors.
Nasdaq will notify the Commission
through the filing of a Form 19b–4(e)
when an ETF lists on Nasdaq pursuant
to proposed Nasdaq Rule 5704. The
Form 19b–4(e) will identify the Nasdaq
rule under which the ETF is being
generically listed. The Exchange will
retain its right to file a Form 19b–4
under Nasdaq Rule 5705(b) and Nasdaq
Rule 5735, respectively, for the listing
and trading of Index Fund Shares or
Managed Fund Shares. Additionally,
Nasdaq will also file a Form 19b–4(e) for
ETFs that decide to switch from
operating under Nasdaq rules other than
proposed Nasdaq Rule 5704 to operating
in compliance with Rule 6c–11 and in
conformity with proposed Nasdaq Rule
5704.
The Exchange also proposes to amend
Nasdaq Rule 4120 (Limit Up-Limit
Down Plan and Trading Halts) and
Nasdaq Rule 5615 (Exemptions from
Certain Corporate Governance
Requirements), Nasdaq Rule 5705(b)
(Index Fund Shares), Nasdaq Rule 5735
(Managed Fund Shares), and to
discontinue the quarterly reports
currently required with respect to
Managed Fund Shares under Nasdaq
Rule 5735(b).
Proposed Nasdaq Rule 5704 will
enable ETFs, whether index-based or
actively managed, to qualify for listing
and trading on the Exchange both on an
initial and continued basis by meeting
and maintaining compliance with the
with forming and operating certain ETFs unable to
rely on existing orders; and (2) creates a level
playing field for ETFs that can rely on the rule. As
such, the rule will enable increased product
competition among certain ETF providers, which
can lead to lower fees for investors, encourage
financial innovation, and increase investor choice
in the ETF market.’’ See Adopting Release at 57204.
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criteria set forth in Rule 6c–11.12 The
specific provisions of proposed Nasdaq
Rule 5704 are presented below, as well
as amendments to Nasdaq Rule 4120
(Limit Up-Limit Down Plan and Trading
Halts), Nasdaq Rule 5615 (Exemptions
from Certain Corporate Governance
Requirements), Nasdaq Rule 5705(b)
(Index Fund Shares), and Nasdaq Rule
5735 (Managed Fund Shares), which
would be necessitated by adoption of
the proposed rule. Additionally, the
proposed rule change to discontinue the
quarterly reports currently required
with respect to Managed Fund Shares
under Nasdaq Rule 5735(b) is also
discussed below.
Proposed Nasdaq Rule 5704
Proposed Definitions
Proposed Nasdaq Rule 5704(a)(1)(A)
defines the term ‘‘Exchange Traded
Fund’’ (‘‘ETF’’) as having the same
meaning as the term ‘‘exchange-traded
fund’’ as defined in Rule 6c–11.13 In the
case of an ETF that is not currently
listed on a national securities exchange,
the portion of the definition found in
Rule 6c–11 requiring such listing will
become applicable if the ETF is listed
on a national securities exchange.
Proposed Nasdaq Rule 5704(a)(1)(B)
defines the term ‘‘Exchange Traded
Fund Share’’ as having the same
meaning as the term is defined as
having in Rule 6c–11.14
Proposed Nasdaq Rule 5704(a)(1)(C)
defines the term ‘‘Reporting Authority’’
in respect of a particular series of
Exchange Traded Fund Shares to mean
Nasdaq, a wholly-owned subsidiary of
Nasdaq, or an institution or reporting
service designated by Nasdaq or its
subsidiary as the official source for
calculating and reporting information
relating to such series, including, but
not limited to, any current index or
portfolio value; the current value of the
portfolio of any securities required to be
deposited in connection with issuance
of Exchange Traded Fund Shares; the
amount of any dividend equivalent
payment or cash distribution to holders
12 Rule 6c–11 is now effective so Exchange
Traded Fund Shares that are permitted to operate
in reliance on Rule 6c–11 would be eligible for
listing and trading on Nasdaq under proposed
Nasdaq Rule 5704.
13 Rule 6c–11(a)(1) defines ‘‘exchange-traded
fund’’ as a registered open-end management
company: (i) That issues (and redeems) creation
units to (and from) authorized participants in
exchange for a basket and a cash balancing amount
if any; and (ii) Whose shares are listed on a national
securities exchange and traded at marketdetermined prices. The terms ‘‘authorized
participant,’’ ‘‘basket’’ and ‘‘creation unit’’ are
defined in Rule 6c–11(a)(1).
14 Rule 6c–11(a)(1) defines ‘‘exchange-traded fund
share’’ as a share of stock issued by an exchangetraded fund.
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19985
of Exchange Traded Fund Shares, net
asset value, and other information
relating to the issuance, redemption or
trading of Exchange Traded Fund
Shares.15 The definition also notes that
it does not imply that an institution or
reporting service that is the source for
calculating and reporting information
relating to Exchange Traded Fund
Shares must be designated by Nasdaq or
its subsidiary; the term ‘‘Reporting
Authority’’ does not refer to an
institution or reporting service not so
designated.
Initial and Continued Listing.16
Proposed Nasdaq Rule 5704(b) states
that Nasdaq may approve a series of
Exchange Traded Fund Shares for
listing and trading pursuant to Rule
19b–4(e) under the Act, provided each
series of Exchange Traded Fund Shares
is eligible to operate in reliance on Rule
6c-11 and satisfies the requirements of
Rule 5704 on an initial and continued
listing basis.17
15 The proposed definition of ‘‘Reporting
Authority’’ is substantively identical to the
definition for this term in Nasdaq Rule
5705(b)(1)(C) (Index Fund Shares) and in Nasdaq
Rule 5735(c)(4) (Managed Fund Shares).
16 Nasdaq may list and trade a series of Exchange
Traded Fund Shares based on one or more foreign
or domestic indexes or portfolios. Each series of
Exchange Traded Fund Shares based on each
particular index or portfolio, or combination
thereof, will be designated as a separate series and
will be identified by a unique symbol. The
components that are included in an index or
portfolio on which a series of Exchange Traded
Fund Shares is based will be selected by such
person, which may be Nasdaq or an agent or
wholly-owned subsidiary thereof, as will have
authorized use of such index or portfolio. Such
index or portfolio may be revised from time to time
as may be deemed necessary or appropriate to
maintain the quality and character of the index or
portfolio.
17 Rule 6c–11(c) sets forth certain conditions
applicable to exchange-traded funds, and specifies
the information required to be disclosed
prominently on the fund’s website free of charge,
including the following: (i) Before the opening of
regular trading on the primary listing exchange of
the exchange-traded fund shares, the estimated cash
balancing amount (if any) and the following
information (as applicable) for each portfolio
holding that will form the basis of the next
calculation of current net asset value per share: (A)
Ticker symbol; (B) CUSIP or other identifier; (C)
Description of holding; (D) Quantity of each
security or other asset held; and (E) Percentage
weight of the holding in the portfolio; (ii) The
exchange-traded fund’s current net asset value per
share, market price, and premium or discount, each
as of the end of the prior business day; (iii) A table
showing the number of days the exchange-traded
fund’s shares traded at a premium or discount
during the most recently completed calendar year
and the most recently completed calendar quarters
since that year (or the life of the exchange-traded
fund, if shorter); (iv) A line graph showing
exchange-traded fund share premiums or discounts
for the most recently completed calendar year and
the most recently completed calendar quarters since
that year (or the life of the exchange-traded fund,
if shorter); (v) The exchange-traded fund’s median
bid-ask spread, expressed as a percentage rounded
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Proposed Nasdaq Rule 5704(b)(1) says
that each series of Exchange Traded
Fund Shares must also satisfy the follow
criteria on an initial and continued
listing (except for paragraph (A) below)
basis:
Proposed Nasdaq Rule 5704(b)(1)(A)
states that for each series of Exchange
Traded Fund Shares, Nasdaq will
establish a minimum number of
Exchange Traded Fund Shares required
to be outstanding at the time of
commencement of trading on Nasdaq.18
Proposed Nasdaq Rule 5704(b)(1)(B)
sets forth the requirements regarding
index calculation and dissemination
that must be satisfied on both an initial
and continued listing basis. Proposed
Nasdaq Rule 5704(b)(1)(B)(i) states that
if the investment adviser to an ETF is
affiliated with a broker-dealer, such
investment adviser will erect and
maintain a ‘‘fire wall’’ between the
investment adviser and the brokerdealer with respect to access to
information concerning the composition
and/or changes to the underlying
portfolio. Additionally, personnel who
make decisions on the ETF’s portfolio
composition must be subject to
procedures designed to prevent the use
and dissemination of material
nonpublic information regarding the
applicable ETF portfolio. Proposed
Nasdaq Rule 5704(b)(1)(B)(ii) states that
the Reporting Authority that provides
the ETF’s portfolio must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material non-public
information regarding the actual
components of the portfolio. Proposed
Nasdaq Rule 5704(b)(1)(B)(iii) states that
if the index underlying a series of
Exchange Traded Fund Shares is
maintained by a broker-dealer or fund
adviser, the broker-dealer or fund
adviser shall erect and maintain a ‘‘fire
wall’’ around the personnel who have
access to information concerning
to the nearest hundredth (and computed in a
manner described in Rule 6c–11(c)(v)(A) through
(D)); and (vi) If the exchange-traded fund’s premium
or discount is greater than 2% for more than seven
consecutive trading days, a statement that the
exchange-traded fund’s premium or discount, as
applicable, was greater than 2% and a discussion
of the factors that are reasonably believed to have
materially contributed to the premium or discount,
which must be maintained on the website for at
least one year thereafter. Rule 6c–11(c)(4) provides
that the exchange-traded fund may not seek,
directly or indirectly, to provide investment returns
that correspond to the performance of a market
index by a specified multiple, or to provide
investment returns that have an inverse relationship
to the performance of a market index, over a
predetermined period of time.
18 Nasdaq will generally consider at least one
creation unit outstanding at the time of listing to be
sufficient for the purposes of complying with this
requirement.
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changes and adjustments to the index
and the index will be calculated by a
third party who is not a broker-dealer or
fund adviser. Proposed Nasdaq Rule
5704(b)(1)(B)(iv) states that any advisory
committee, supervisory board, or similar
entity that advises a Reporting
Authority or that makes decisions on
the index composition, methodology
and related matters, must implement
and maintain, or be subject to,
procedures designed to prevent the use
and dissemination of material nonpublic information regarding the
applicable index.19
Proposed Nasdaq Rule 5704(b)(1)(C)
states that regular market session
trading will occur between 9:30 a.m.
and either 4:00 p.m. or 4:15 p.m. for
each series of Exchange Traded Fund
Shares, as specified by Nasdaq. In
addition, Nasdaq may designate a series
of Exchange Traded Fund Shares for
trading during a pre-market session
beginning at 4:00 a.m. and/or a postmarket session ending at 8:00 p.m.
Proposed Nasdaq Rule 5704(b)(1)(D)
states that the minimum price variation
for quoting and entry of orders in
Exchange Traded Fund Shares is
$0.01.20
Proposed Nasdaq Rule 5704(b)(2) sets
forth the circumstances under which
Nasdaq will consider the suspension of
trading and removal in, and will initiate
delisting proceedings under the Nasdaq
Rule 5800 Series of, a series of Exchange
Traded Fund Shares. These
circumstances will include the
following: (i) Proposed Nasdaq Rule
5704(b)(2)(A) states that if Nasdaq
becomes aware that the series of
Exchange Traded Fund Shares is no
longer eligible to operate in reliance on
Rule 6c–11; (ii) Proposed Nasdaq Rule
5704(b)(2)(B) states that if, following the
initial twelve month period after
commencement of trading on Nasdaq of
the series of Exchange Traded Fund
Shares, there are fewer than 50
beneficial holders; (iii) Proposed Nasdaq
Rule 5704(b)(2)(C) states that if any of
the other requirements set forth in this
rule are not continuously maintained; or
(iv) Proposed Nasdaq Rule 5704(b)(2)(D)
states that if such other event will occur
or condition exists which in the opinion
of Nasdaq, makes further dealings on
Nasdaq inadvisable.21
19 The proposed requirements are substantively
identical to those included in Nasdaq Rule 5705(b)
(Index Fund Shares) and in Nasdaq Rule 5735
(Managed Fund Shares).
20 The proposed minimum price variation for
quoting and entry of orders is substantively
identical to the requirement included in Nasdaq
Rule 5745(b)(3) (Exchange-Traded Managed Fund
Shares (‘‘NextShares’’)).
21 Nasdaq may also submit a separate rule filing
under Section 19(b) of the Act to permit the listing
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With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in a series of
Exchange Traded Fund Shares. Trading
in Exchange Traded Fund Shares will be
halted if the circuit breaker parameters
in Nasdaq Rule 4120 have been reached.
Trading also may be halted because of
market conditions or for reasons that, in
the view of the Exchange, make trading
in Exchange Traded Fund Shares
inadvisable. An example of such an
event as mentioned above in proposed
Nasdaq Rule 5704(b)(2)(D) would
include if the value of the index or
portfolio of securities on which the
series of Exchange Traded Fund Shares
is based is no longer calculated or
available or an interruption to the
dissemination persists past the trading
day in which it occurred. Another
example includes the extent to which
certain information about the Exchange
Traded Fund Shares that is required to
be disclosed under Rule 6c–11 of the
1940 Act is not being made available.
The Exchange will also halt trading if
it becomes aware that the net asset value
for a series of Exchange Traded Fund
Shares is not being disseminated to all
market participants at the same time.22
In addition, as proposed herein, Nasdaq
may halt trading in Exchange Traded
Fund Shares if trading in the underlying
securities compromising [sic] the index
or portfolio applicable to such series of
Exchange Traded Fund Shares has been
halted in the primary market(s), or if
trading has ceased in securities
underlying the index or portfolio, or in
the presence of other unusual
conditions or circumstances detrimental
to the maintenance of a fair and orderly
market.23
Proposed Nasdaq Rule 5704(c) states
that Nasdaq will implement and
maintain written surveillance
procedures for Exchange Traded Fund
Shares. The Exchange believes that the
proposal is designed to prevent
fraudulent and manipulative acts and
practices because the Exchange will
perform ongoing surveillance of
Exchange Traded Fund Shares listed on
and trading of a series of Exchange Traded Fund
Shares. If Nasdaq submits such a rule filing, any of
the statements or representations regarding (a) the
index composition; (b) the description of the
portfolio; (c) limitations on portfolio holdings or
reference assets; (d) dissemination and availability
of the index, portfolio information, or intraday
indicative values; or (e) the applicability of Nasdaq
listing rules specified in such proposals are not
continuously maintained, will constitute continued
listing standards with respect to that series of
Exchange Traded Fund Shares.
22 See Nasdaq Rule 4120(a)(10). Nasdaq may
resume trading once the net asset value becomes
available to all market participants.
23 See Proposed Nasdaq Rule 4120(a)(9).
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the Exchange in order to ensure
compliance with Rule 6c–11 and the
1940 Act on an ongoing basis. Nasdaq
believes that the manipulation concerns
that such standards are intended to
address are otherwise mitigated by a
combination of the Exchange’s
surveillance procedures, Nasdaq’s
ability to halt trading under the
proposed Rule Nasdaq Rule 4120(a)(9),
Nasdaq Rule 4120(a)(10), and the
Exchange’s ability to suspend trading
and commence delisting proceedings
under proposed Nasdaq Rule
5704(b)(2)(B). As previously stated,
Nasdaq is proposing to amend Nasdaq
Rule 4120(b)(4)(A) to clarify that
Exchange Traded Fund Shares are
subject to Nasdaq’s halt authority.
Nasdaq also believes that such
concerns are further mitigated by
enhancements to the arbitrage
mechanism that will come from
compliance with Rule 6c–11,
specifically the additional flexibility
provided to issuers of Exchange Traded
Fund Shares through the use of custom
baskets for creations and redemptions
and the additional information made
available to the public through the
additional disclosure obligations.24 The
Exchange believes that the combination
of these factors will act to keep
Exchange Traded Fund Shares trading
near the value of their underlying
holdings and further mitigate concerns
around manipulation of Exchange
Traded Fund Shares on Nasdaq.
The Exchange will monitor for
compliance with Rule 6c–11 to ensure
that the continued listing standards are
being met. The Exchange will also
periodically review the website of series
of Exchange Traded Fund Shares to
ensure that the requirements of Rule 6c–
11 are being met. Nasdaq also will
employ intraday alerts that will notify
Exchange personnel of unusual trading
activity throughout the day that could
be indicative of unusual conditions or
circumstances that could be detrimental
to the maintenance of a fair and orderly
market. The Exchange also notes that
Nasdaq Rule 5701(d) would require an
issuer of Exchange Traded Fund Shares
to notify Nasdaq with prompt
notification after the issuer becomes
aware of any non-compliance with the
requirements of the Nasdaq Rule 5700
Series, which would encompass any
failure of the issuer to comply with Rule
6c–11 or the 1940 Act.25
24 The Exchange notes that the Commission came
to a similar conclusion in several places in the Rule
6c–11 Release. See Adopting Release at 15–18; 60–
61; 69–70; 78–79; 82–84; and 95–96.
25 The Exchange notes that failure by an issuer to
notify the Exchange of non-compliance pursuant to
Nasdaq Rule 5701(d) would itself be considered
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Additionally, Nasdaq represents that
its surveillance procedures are adequate
to properly monitor the trading of the
Exchange Traded Fund Shares in all
trading sessions and to deter and detect
violations of Exchange rules and
applicable federal securities laws.26
Specifically, the Exchange intends to
utilize its existing surveillance
procedures applicable to Nasdaq-listed
securities, which are currently
applicable to Index Fund Shares and
Exchange Traded Fund Shares, among
other product types, to monitor trading
in Exchange Traded Fund Shares. The
Exchange or the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’),
on behalf of the Exchange, will
communicate as needed regarding
trading in Exchange Traded Fund
Shares and certain of their applicable
underlying components with other
markets that are members of the
Intermarket Surveillance Group (‘‘ISG’’)
or with which Nasdaq has in place a
comprehensive surveillance sharing
agreement (‘‘CSSA’’).
Additionally, FINRA, on behalf of the
Exchange, is able to access, as needed,
trade information for certain fixed
income securities that may be held by
a series of Exchange Traded Fund
Shares reported to FINRA’s Trade
Reporting and Compliance Engine
(‘‘TRACE’’). FINRA also can access data
obtained from the Municipal Securities
Rulemaking Board’s (‘‘MSRB’’)
Electronic Municipal Market Access
(‘‘EMMA’’) system relating to municipal
bond trading activity for surveillance
purposes in connection with trading in
a series of Exchange Traded Fund
Shares, to the extent that a series of
Exchange Traded Fund Shares holds
municipal securities. Finally, as noted
above, the issuer of a series of Exchange
Traded Fund Shares will be required to
comply with Rule 10A–3 under the Act
for the initial and continued listing of
Exchange-Traded Fund Shares, as
provided under Nasdaq Rule
5615(a)(6)(A) and the changes to Nasdaq
Rule 5615(a)(6)(B) as proposed herein.
The Exchange notes that Exchange
Traded Fund Shares will be subject to
all Exchange rules applicable to equities
trading, including rules governing
Exchange member disclosure
obligations in connection with equities
trading, and that Rule 6c–11 does not
change the applicability of these
Exchange rules with respect to these
securities.27
Proposed Nasdaq Rule 5704(d) states
that upon termination of an ETF,
Nasdaq requires that each series of
Exchange Traded Fund Shares issued in
connection with such entity be removed
from listing.
Proposed Nasdaq Rule 5704(e) states
that neither Nasdaq, the Reporting
Authority, nor any agent of Nasdaq will
have any liability for damages, claims,
losses or expenses caused by any errors,
omissions, or delays in calculating or
disseminating any current index or
portfolio value, the current value of the
portfolio of securities required to be
deposited to the open-end management
investment company in connection with
issuance of a series of Exchange Traded
Fund Shares; the amount of any
dividend equivalent payment or cash
distribution to holders of a series of
Exchange Traded Fund Shares; net asset
value; or other information relating to
the purchase, redemption or trading of
a series of Exchange Traded Fund
Shares, resulting from any negligent act
or omission by Nasdaq, the Reporting
Authority or any agent of Nasdaq, or any
act, condition or cause beyond the
reasonable control of Nasdaq, its agent,
or the Reporting Authority, including,
but not limited to, an act of God; fire;
flood; extraordinary weather conditions;
war; insurrection; riot; strike; accident;
action of government; communications
or power failure; equipment or software
malfunction; or any error, omission or
delay in the reports of transactions in
one or more underlying securities.28
Proposed Nasdaq Rule 5704(f) states
that a security that has previously been
approved for listing on the Exchange
pursuant to the generic listing
requirements specified in Nasdaq Rule
5705(b) or Nasdaq Rule 5735(b)(1), or
pursuant to an approval of a proposed
rule change or subject to a notice of
effectiveness by the Commission, may
be considered for listing solely under
this Rule 5704 if such security is eligible
to operate in reliance on Rule 6c–11
non-compliance with the requirements of the
Nasdaq Rule 5700 Series and subject to potential
trading halts and the delisting process in the
Nasdaq Rule 5800 Series.
26 Nasdaq will obtain a representation from the
ETF that the net asset value per share for each series
of Exchange Traded Fund Shares will be calculated
daily and will be made available to all market
participants at the same time. Nasdaq will also
obtain a representation from the issuers of each
series of Exchange Traded Fund Shares that the
requirements of proposed Nasdaq Rule 5704 will be
satisfied.
27 With respect to trading in Exchange Traded
Fund Shares, all of the Nasdaq member obligations
relating to product description and prospectus
delivery requirements will continue to apply in
accordance with the Exchange rules and federal
securities laws, and Nasdaq will continue to
monitor its members for compliance with such
requirements, which are not changing as a result of
Rule 6c–11 under the 1940 Act.
28 The proposed requirements are substantively
identical to those included in Nasdaq Rule
5705(b)(11) (Index Fund Shares) and in Nasdaq
Rule 5735(e) (Managed Fund Shares).
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under the 1940 Act. At the time of
listing of such security under this Rule
5704, the continued listing requirements
applicable to such previously-listed
securities will be those specified in
paragraph (b) of this Rule 5704. Any
requirements for listing as specified in
Nasdaq Rule 5705(b) or Nasdaq
5735(b)(1), or an approval order or
notice of effectiveness of a separate
proposed rule change, that differ from
the requirements of this Rule 5704 will
no longer be applicable to such
security.29
Amendments to Nasdaq Rule 4120.
Limit Up-Limit Down Plan and Trading
Halts
The Exchange proposes to amend
Nasdaq Rule 4120 to include Exchange
Traded Fund Shares in Nasdaq Rule
4120(a)(9) and Nasdaq Rule
4120(a)(10) 30 as these rules apply to
trading halts. This will ensure the
applicability of trading halts to the
trading of Exchange Traded Fund
Shares listed on Nasdaq and traded on
Nasdaq pursuant to unlisted trading
privileges.
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Amendments to Nasdaq Rule 5615.
Exemptions From Certain Corporate
Governance Requirements
The Exchange also proposes to amend
the definition of ‘‘Derivative Securities’’
in Nasdaq Rule 5615 to incorporate
Exchange Traded Fund Shares so Rule
5615 and its exemptions from certain
corporate governance requirements are
applicable to Exchange Traded Fund
Shares. The proposed addition of
Exchange Traded Fund Shares to
Nasdaq Rules 4120 and 5615 would
subject Exchange Traded Fund Shares to
the same requirements currently
applicable to other 1940 Act-registered
investment company securities (i.e.,
Index Fund Shares, Managed Fund
Shares and Portfolio Depositary
Receipts).
29 To the extent that a series of Exchange Traded
Fund Shares does not satisfy one or more of the
criteria in proposed Nasdaq Rule 5704, the
Exchange may file a separate proposal under
Section 19(b) of the Act in order to list such series
on the Exchange. Further, in the event that a series
of Exchange Traded Fund Shares becomes listed
under proposed Nasdaq Rule 5704 and
subsequently can no longer rely on Rule 6c–11, so
long as the series of Exchange Traded Fund Shares
may otherwise rely on exemptive relief issued by
the Commission, such series of Exchange Traded
Fund Shares may be listed as a series of Index Fund
Shares under Nasdaq Rule 5705 or Managed Fund
Shares under Nasdaq Rule 5735, as applicable, as
long as the series of Exchange Traded Fund Shares
meets all listing requirements under the applicable
rule.
30 The definition of ‘‘Derivative Securities’’ found
in Nasdaq Rule 4102(b)(4)(A) is referenced in
Nasdaq Rule 4120(a)(10) as the applicable
definition for that rule.
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Amendments to Nasdaq Rule 5705(b).
Index Fund Shares
The Exchange also proposes to amend
the definition of ‘‘Derivative Securities
Products’’ in Nasdaq Rule
5705(b)(3)(A)(i)a. to incorporate
Exchange Traded Fund Shares so the
exclusions applicable to Derivative
Securities Products in Nasdaq Rule
5705(b)(3)(A) will also apply to
Exchange Traded Fund Shares, as well
as minor changes to improve clarity.
Nasdaq believes that this is appropriate
because ETFs that are currently listed
pursuant to Nasdaq Rule 5705(b) and
are permitted to operate in reliance on
Rule 6c–11 and list pursuant to
proposed Nasdaq Rule 5704 should be
included in the existing exclusions.
Amendments to Nasdaq Rule 5735.
Managed Fund Shares
The Exchange also proposes to amend
the definition of ‘‘Exchange Traded
Derivative Securities’’ in Nasdaq Rule
5735(c)(6) to incorporate Exchange
Traded Fund Shares so the exclusions
applicable to Exchange Traded
Derivative Securities in Nasdaq Rule
5735(b)(1)(A) will also apply to
Exchange Traded Fund Shares, as well
as a minor change to improve clarity.
Nasdaq believes this is appropriate
because ETFs that are currently listed
pursuant to Nasdaq Rule 5735(b) and
are permitted to operate in reliance on
Rule 6c–11 and list pursuant to
proposed Nasdaq Rule 5704 should be
included in the existing exclusions.
Proposed Discontinuance of Quarterly
Reporting Obligation for Managed Fund
Shares
On September 23, 2016, the SEC
approved Nasdaq Rule 5735(b)(1),
adopting generic listing standards for
Managed Fund Shares.31 In proposing
that rule, Nasdaq represented that it
would provide the Commission staff
with a report each calendar quarter
about issues of Managed Fund Shares
listed under that rule.32
31 See Exchange Act Release No. 78918
(September 23, 2016), 81 FR 67033 (September 29,
2016) (SR–NASDAQ–2016–104).
32 See Exchange Act Release No. 78616 (August
18, 2016), 81 FR 57968 at 57973 (August 24, 2016)
(‘‘the Exchange will provide the Commission staff
with a report each calendar quarter that includes
the following information for issues of Managed
Fund Shares listed during such calendar quarter
under Rule 5735(b)(1): (1) Trading symbol and date
of listing on the Exchange; (2) the number of active
authorized participants and a description of any
failure of an issue of Managed Fund Shares or of
an authorized participant to deliver shares, cash, or
cash and financial instruments in connection with
creation or redemption orders; and (3) a description
of any failure of an issue of Managed Fund Shares
to comply with Nasdaq Rule 5735’’).
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The quarterly reports were initially
intended to provide SEC Staff insight
into the number and type of funds listed
pursuant to Nasdaq Rule 5735(b)(1), as
well as highlight any issues regarding
the trading of such funds or a funds’
compliance with the continued listing
standards. Nasdaq believes that since
the implementation of this requirement,
SEC Staff has received an ample number
of reports as to gain sufficient
understanding of the products listed
pursuant to Nasdaq Rule 5735(b)(1).
SEC Staff has now had several years of
experience monitoring through these
reports and has not detected any
significant issues involving Managed
Fund Shares listed under Nasdaq Rule
5735(b)(1).
Nasdaq also believes such quarterly
reports will no longer be necessary
because Rule 6c–11 collapses the
distinction between Index Fund Shares
and Managed Fund Shares, which
illustrates that the SEC has reached a
sufficient level of comfort with Managed
Fund Shares. As a result, the Exchange
believes that the quarterly reports no
longer serve an ongoing purpose and,
therefore, proposes to discontinue such
reporting going forward. Rule 6c–11(d)
includes specific ongoing reporting
requirements for ETFs, such as written
agreements between an authorized
participant and a fund allowing
purchase or redemption of creation
units, information regarding the baskets
exchanged with authorized participants,
and the identity of authorized
participants transacting with a fund.33
This information will be sufficient for
the SEC’s examination staff to determine
compliance with Rule 6c–11 and the
applicable federal securities laws.34
33 Rule 6c–11(d), which sets forth recordkeeping
requirements applicable to exchange-traded funds,
provides that that the exchange-traded fund must
maintain and preserve for a period of not less than
five years, the first two years in an easily accessible
place: (1) All written agreements (or copies thereof)
between an authorized participant and the
exchange-traded fund or one of its service providers
that allows the authorized participant to place
orders for the purchase or redemption of creation
units; (2) For each basket exchanged with an
authorized participant, records setting forth: (i) The
ticker symbol, CUSIP or other identifier, description
of holding, quantity of each holding, and percentage
weight of each holding composing the basket
exchanged for creation units; (ii) If applicable,
identification of the basket as a custom basket and
a record stating that the custom basket complies
with policies and procedures that the exchangetraded fund adopted pursuant to paragraph (c)(3) of
Rule 6c–11; (iii) Cash balancing amount (if any);
and (iv) Identity of authorized participant
transacting with the exchange traded fund.
34 In the Adopting Release, the SEC stated,
‘‘requiring ETFs to maintain records regarding each
basket exchanged with authorized participants will
provide our examination staff with a basis to
understand how baskets are being used by ETFs,
particularly with respect to custom baskets. In order
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Nasdaq also believes that for the
reasons stated above, as well as that the
quarterly reports as currently required
are duplicative of the new Rule 6c–11(d)
requirements, there is no longer a reason
to keep this reporting requirement. To
avoid unnecessary overlap and potential
inconsistency, as well as to avoid
unnecessary, duplicative burdens on
authorized participants and their firms
in providing and maintaining
information regarding creation and
redemption activity, the Exchange
proposes to discontinue the filing of
quarterly reports with respect to
Managed Fund Shares under Nasdaq
Rule 5735(b).
2. Statutory Basis
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The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,35 in general, and furthers the
objectives of Section 6(b)(5) of the Act,36
in particular, because it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to, and perfect the
mechanisms of, a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest
because it would facilitate the listing
and trading of additional Exchange
Traded Fund Shares, which would
enhance competition among market
participants, to the benefit of investors
and the marketplace. The generic listing
rules in proposed Nasdaq Rule 5704, as
described above, will facilitate efficient
procedures for listing ETFs that are
permitted to operate in reliance on Rule
6c–11 and are consistent with and will
further the SEC’s goals in adopting Rule
6c–11. Nasdaq will notify the
Commission through the filing of a
Form 19b–4(e) when an ETF lists on
Nasdaq pursuant to proposed Nasdaq
Rule 5704. The Form 19b–4(e) will
identify the Nasdaq rule under which
the ETF is being generically listed. The
to provide our examination staff with detailed
information regarding basket composition, however,
we have modified rule 6c–11 to require the ticker
symbol, CUSIP or other identifier, description of
holding, quantity of each holding, and percentage
weight of each holding composing the basket
exchanged for creation units as part of the basket
records, instead of the name and quantities of each
position as proposed. We believe that this
additional information will better enable our
examination staff to evaluate compliance with the
rule and other applicable provisions of the federal
securities laws.’’ See Adopting Release at 57195.
35 15 U.S.C. 78f(b).
36 15 U.S.C. 78f(b)(5).
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Exchange will retain its right to file a
Form 19b–4 under Nasdaq Rule 5705(b)
and Nasdaq Rule 5735, respectively, for
the listing and trading of Index Fund
Shares or Managed Fund Shares.
Nasdaq will also file a Form 19b–4(e) for
ETFs that decide to switch from
operating under Nasdaq rules other than
proposed Nasdaq Rule 5704 to operating
in compliance with Rule 6c-11 and in
conformity with proposed Nasdaq Rule
5704.
Additionally, by allowing Exchange
Traded Fund Shares to be listed and
traded on the Exchange without a prior
SEC approval order or notice of
effectiveness pursuant to Section 19(b)
of the Act, proposed Nasdaq Rule 5704
will significantly reduce the time frame
and costs associated with bringing
Exchange Traded Fund Shares to
market, thereby promoting market
competition among issuers of these
securities, to the benefit of the investors.
Also, the proposed change would fulfill
the intended objective of Rule 19b–4(e)
under the Act by permitting Exchange
Traded Fund Shares that satisfy the
proposed listing standards to be listed
and traded without separate SEC
approval.
With respect to both proposed Nasdaq
Rule 5704(a)(1)(A), which defines the
term ‘‘Exchange Traded Fund’’, and
proposed Nasdaq Rule 5704(a)(1)(B),
which defines the term ‘‘Exchange
Traded Fund Share’’, the Exchange
believes these definitions will increase
the clarity to the benefit of investors and
the marketplace. Additionally, these
terms mirror the definitions as set forth
in Rule 6c–11.37
With respect to proposed Nasdaq Rule
5704(a)(1)(C), which defines the term
‘‘Reporting Authority’’, the Exchange
believes that defining the term generally
consistent with how it is defined in
Nasdaq Rule 5705 38 and Nasdaq Rule
5735 39 will increase the clarity to the
benefit of investors and the marketplace.
With respect to proposed Nasdaq Rule
5704(b), Exchange Traded Fund Shares
will be listed and traded on the
Exchange subject to the requirement
that each series of Exchange Traded
Fund Shares is eligible to operate in
reliance on Rule 6c–11 40 and must
satisfy the requirements of this
proposed Nasdaq Rule 5704 on an
initial and continued listing basis. This
requirement will ensure that Exchangelisted Exchange Traded Fund Shares
37 See Adopting Release at 57178 and at 57234,
respectively.
38 See Nasdaq Rule 5705(b)(1)(C).
39 See Nasdaq Rule 5735(c)(4).
40 Rule 6c–11(c) sets forth certain conditions
applicable to ETFs, including information required
to be disclosed on the ETF’s website.
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19989
continue to operate in a manner that
fully complies with the portfolio
transparency requirements of Rule 6c–
11(c). This will also ensure that
Exchange Traded Fund Shares listed
and traded on the Exchange in
accordance with Nasdaq Rule 5704 on
an initial and continued listing basis
will serve to perfect the mechanisms of,
a free and open market and a national
market system and, in general, to protect
investors and the public interest.
With respect to proposed Nasdaq Rule
5704(b)(1) and subparagraphs (A)–(D)
thereunder (with the exception that
subparagraph (A) only applies on an
initial listing basis),41 the Exchange
believes it is to the benefit of investors
and the marketplace that Nasdaq may
approve an ETF for listing and trading
pursuant to Rule 19b–4(e) under the
Act. The approval is also contingent on
that each series of Exchange Traded
Fund Shares is eligible to operate in
reliance on Rule 6c–11 and satisfies the
requirements of Rule 5704 on an initial
and continued listing basis.
Nasdaq will monitor for compliance
with the continued listing requirements
as discussed above. If the ETF is not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
proposed Nasdaq Rule 5704(b)(2).42 The
Exchange believes that this will help to
prevent fraudulent and manipulative
acts and practices.
The Exchange believes this also
fulfills the intended objective of Rule
19b–4(e) under the Act by allowing
Exchange Traded Fund Shares to be
listed and traded without requiring
separate Commission approval. This
will provide investors with additional
investment choices in which they may
choose to invest.
With respect to proposed Nasdaq Rule
5704(c), the Exchange will implement
and maintain written surveillance
procedures for Exchange Traded Fund
Shares and represents that its
surveillance procedures are adequate to
properly monitor such trading in all
trading sessions and to deter and detect
violations of Nasdaq rules. Specifically,
41 Proposed Nasdaq Rule 5704(b)(1)(A)–(D)
covers: (i) Establishing a minimum number of
Exchange Traded Fund Shares required to be
outstanding at the time of commencement of
trading on Nasdaq (only applicable on an initial
listing basis); (ii) index and portfolio calculation
and dissemination, as well as ‘‘fire walls’’ and
procedures designed to prevent the use and
dissemination of material non-public information
regarding the actual components of the index or
portfolio; (iii) regular market session trading; and
(iv) the minimum price variation for quoting and
entry of orders in Exchange Traded Fund Shares is
$0.01.
42 See supra note 25.
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the Exchange intends to utilize its
existing surveillance procedures
applicable to securities, which will
include Exchange Traded Fund Shares,
to monitor trading in the Exchange
Traded Fund Shares (additional
surveillance processes and procedures
are described herein). These
surveillance procedures promote just
and equitable principles of trade, to
remove impediments to, and perfect the
mechanisms of, a free and open market
and a national market system and, in
general, to protect investors and the
public interest. The Exchange believes
that the proposal is designed to prevent
fraudulent and manipulative acts and
practices because the Exchange will
perform ongoing surveillance of
Exchange Traded Fund Shares listed on
the Exchange in order to ensure
compliance with Rule 6c–11 on an
ongoing basis.
The Exchange also believes that such
concerns are further mitigated by
enhancements to the arbitrage
mechanism that will come from Rule
6c–11, specifically the additional
flexibility provided to issuers of
Exchange Traded Fund Shares through
the use of custom baskets for creations
and redemptions and the additional
information made available to the
public through the additional disclosure
obligations.43 The Exchange believes
that the combination of these factors
will act to keep Exchange Traded Fund
Shares trading near the value of their
underlying holdings and further
mitigate concerns around manipulation
of Exchange Traded Fund Shares on
Nasdaq.
The Exchange will monitor for
compliance with Rule 6c–11 to ensure
that the continued listing standards are
being met. The Exchange will also
periodically review the website of series
of Exchange Traded Fund Shares to
ensure that the requirements of Rule 6c–
11 are being met. Nasdaq also will
employ intraday alerts that will notify
Exchange personnel of unusual trading
activity throughout the day that could
be indicative of unusual conditions or
circumstances that could be detrimental
to the maintenance of a fair and orderly
market. The Exchange also notes that
Nasdaq Rule 5701(d) would require an
issuer of Exchange Traded Fund Shares
to notify Nasdaq with prompt
notification after the issuer becomes
aware of any non-compliance with the
requirements of the Nasdaq Rule 5700
Series, which would encompass any
43 The Exchange notes that the Commission came
to a similar conclusion in several places in the Rule
6c–11 Release. See Adopting Release at 15–18; 60–
61; 69–70; 78–79; 82–84; and 95–96.
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failure of the issuer to comply with Rule
6c–11.
Nasdaq also believes that its
surveillance procedures are adequate to
properly monitor the trading of the
Exchange Traded Fund Shares in all
trading sessions and to deter and detect
violations of Exchange rules and
applicable federal securities laws.
Specifically, the Exchange intends to
utilize its existing surveillance
procedures applicable to Nasdaq-listed
securities, which are currently
applicable to Index Fund Shares and
Managed Fund Shares, among other
product types, to monitor trading in
Exchange Traded Fund Shares. The
Exchange or FINRA, on behalf of the
Exchange, will communicate as needed
regarding trading in Exchange Traded
Fund Shares and certain of their
applicable underlying components with
other markets that are members of the
ISG or with which Nasdaq has in place
a CSSA.
Additionally, FINRA, on behalf of the
Exchange, is able to access, as needed,
trade information for certain fixed
income securities that may be held by
a series of Exchange Traded Fund
Shares reported to FINRA’s TRACE.
FINRA also can access data obtained
from the MSRB EMMA system relating
to municipal bond trading activity for
surveillance purposes in connection
with trading in a series of Exchange
Traded Fund Shares, to the extent that
a series of Exchange Traded Fund
Shares holds municipal securities.
Finally, as noted above, the issuer of a
series of Exchange Traded Fund Shares
will be required to comply with Rule
10A–3 under the Act for the initial and
continued listing of Exchange-Traded
Fund Shares, as provided under Nasdaq
Rule 5615(a)(6)(A) and the changes to
Nasdaq Rule 5615(a)(6)(B) as proposed
herein.
With respect to proposed Nasdaq Rule
5704(d), which states that upon
termination of an ETF that Nasdaq will
remove from listing the Exchange
Traded Fund Shares issued in
connection with such entity. The
Exchange believes that adopting
language similar to language already
included in Nasdaq Rule 5705(b)(9)(B)(i)
and in Nasdaq Rule 5735(d)(2)(E) makes
for consistency among Nasdaq’s rules
and benefits investors and the
marketplace by making clear rules that
lessen potential confusion.
With respect to proposed Nasdaq Rule
5704(e), which sets forth the limitation
of liability applicable to Nasdaq, the
Reporting Authority, or any agent of
Nasdaq, the Exchange believes that
requiring similar written disclosure to
that already required under Nasdaq Rule
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5705(b)(11) and Nasdaq Rule 5735(e)
makes for consistency among Nasdaq’s
rules and benefits investors and the
marketplace by reducing potential
confusion.
With respect to proposed Nasdaq Rule
5704(f), which states that a security that
has previously been approved for listing
on the Exchange pursuant to the generic
listing requirements specified in Nasdaq
Rule 5705(b) or Nasdaq Rule 5735(b)(1),
or pursuant to an approval of a
proposed rule change filed or subject to
a notice of effectiveness by the
Commission, may be considered for
listing solely under this proposed
Nasdaq Rule 5704 if the security is
permitted to operate in reliance on Rule
6c–11 under the 1940 Act and at the
time of listing of such security under
this proposed Nasdaq Rule 5704, the
continued listing requirements
applicable to such security will be those
specified in paragraph (b) of this
proposed Nasdaq Rule 5704, the
Exchange believes [sic] makes for
consistency among Nasdaq’s rules and
benefits investors and the marketplace
by making clear rules that lessen
potential confusion.
The Exchange believes the rest of
proposed Nasdaq Rule 5704(f), which
states any requirements for listing as
specified in Rule 5705(b) or 5735(b)(1),
or an approval order or notice of
effectiveness of a separate proposed rule
change that differ from the requirements
of this Rule 5704 will no longer be
applicable to such securities will
streamline the listing process for such
security, consistent with the regulatory
framework adopted in Rule 6c–11 under
the 1940 Act.
The Exchange believes that proposed
Nasdaq Rule 5704, as well as
amendments to Nasdaq Rules 4120,
5615, 5705(b), and 5735 will facilitate
the listing and trading of additional
types of exchange-traded products that
will enhance competition among market
participants, to the benefit of investors
and the marketplace.
Proposed Nasdaq Rule 5704 and
related amendments to other Nasdaq
rules are also designed to protect
investors and the public interest
because the Exchange deems Exchange
Traded Fund Shares to be equity
securities and therefore they would be
subject to the full panoply of Exchange
rules and procedures that currently
govern the trading of equity securities
on the Exchange.44
Nasdaq believes that the proposed
rule change is designed to prevent
fraudulent and manipulative acts and
practices. The Exchange has in place
44 See
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note 4 above, Adopting Release at 57171.
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written surveillance procedures that are
adequate to properly monitor trading in
the Exchange Traded Fund Shares in all
trading sessions and to deter and detect
violations of Exchange rules and
applicable federal securities laws. The
surveillance procedures for monitoring
compliance with Rule 6c–11 will be
consistent with the manner in which the
Exchange conducts its trading
surveillance for ETFs. The Exchange
will also require that issuers of
Exchange Traded Fund Shares listed
under proposed Nasdaq Rule 5704 must
notify the Exchange regarding instances
of non-compliance. Additionally, the
Exchange will require periodic
certifications from the issuer that it has
maintained compliance with Rule 6c–
11. Nasdaq will also check the ETF’s
website on a periodic basis for the
inclusion of proper disclosure in
compliance with Rule 6c–11. As stated
previously, Nasdaq will continue to
monitor for compliance with the
continued listing standards.
The Exchange believes that the
proposed rule change seeks to
incorporate Rule 6c–11 into Nasdaq’s
rules will promote just and equitable
principles of trade, to remove
impediments to, and perfect the
mechanisms of, a free and open market
and a national market system and, in
general, to protect investors and the
public interest. As the SEC noted in its
Adopting Release, Rule 6c–11 may
allow ETFs to operate in the public
interest and consistent with the
protection of investors and the purposes
fairly intended by the policy and
provisions of the Act,45 as well as lead
to increased capital formation
particularly in the form of an increased
demand for ETFs.46
The Exchange believes that the
amendments to Nasdaq Rules 5705(b)
and 5735 to include Exchange Traded
Fund Shares into the existing exclusions
of these rules promotes just and
equitable principles of trade, removes
impediments to, and perfects the
mechanisms of, a free and open market
and a national market system by
ensuring that Exchange Traded Fund
Shares are treated consistently with
Index Fund Shares and Managed Funds
Shares. The Exchange believes that the
minor changes to these rules improve
clarity and serve to better protect
investors and the public interest.
The Exchange believes that the
discontinuance of quarterly reports
currently required for Managed Fund
Shares under Nasdaq Rule 5735(b) will
no longer be necessary in light of the
45 Id.
46 Id.
at 57166.
at 57220.
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requirements of Rule 6c–11(d) 47 and the
breadth of information that has been
submitted to date under this
requirement promotes just and equitable
principles of trade, removes
impediments to, and perfects the
mechanisms of, a free and open market
and a national market system by
eliminating a requirement no longer
necessary or of benefit to the
Commission.
As discussed above, Rule 6c–11(d)
includes specific ongoing reporting
requirements for exchange-traded funds,
including written agreements between
an authorized participant and a fund
allowing purchase or redemption of
creation units, information regarding the
baskets exchanged with authorized
participants, and the identity of
authorized participants transacting with
a fund. The SEC has stated that the
information required by Rule 6c–11(d)
will provide the SEC’s examination staff
with information to determine
compliance with Rule 6c–11 and
applicable federal securities laws.
In addition, and as discussed above,
Rule 6c–11 collapses the distinction
between Index Fund Shares and
Managed Fund Shares. Nasdaq believes
that the SEC has reached a level of
comfort with Managed Fund Shares that
makes the ongoing receipt of the
information included in the quarterly
reports unnecessary.
In addition and as also discussed
above, Nasdaq believes that since the
implementation of this requirement,
SEC Staff has received an ample number
of reports as to gain sufficient
understanding Managed Fund Shares
and has not detected any significant
issues involving Managed Fund Shares
listed under Nasdaq Rule 5735(b)(1).
The quarterly reports were initially
intended to provide SEC Staff insight
into the number and type of funds listed
pursuant to Nasdaq Rule 5735(b)(1), as
well as highlight any issues regarding
the trading of such funds or a funds’
compliance with the continued listing
standards.
As a result, Nasdaq believes it should
discontinue the filing of quarterly
reports with respect to Managed Fund
Shares under Nasdaq Rule 5735(b). This
will avoid unnecessary overlap and
potential inconsistency between the
quarterly reports and the reporting
requirements of Rule 6c–11(d). It will
also avoid unnecessary, duplicative
burdens on authorized participants and
their firms in providing and maintaining
information regarding creation and
redemption activity.
47 See
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For the above reasons, the Exchange
believes that the proposal is consistent
with the requirements of Section 6(b)(5)
of the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
Rather, the Exchange believes that the
proposed rule change would facilitate
the listing and trading of Exchange
Traded Fund Shares and result in a
significantly more efficient process
surrounding the listing and trading of
ETFs, which will enhance competition
among market participants, to the
benefit of investors and the marketplace.
The Exchange believes that this
would reduce the time frame for
bringing ETFs to market, thereby
reducing the burdens on issuers and
other market participants and promoting
competition. In turn, the Exchange
believes that the proposed change
would make the process for listing
Exchange Traded Fund Shares more
competitive by applying uniform listing
standards with respect to Exchange
Traded Fund Shares.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 4, is
consistent with the Act and rules and
regulations thereunder applicable to a
national securities exchange.48 In
particular, the Commission finds that
the proposed rule change, as modified
by Amendment No. 4, is consistent with
Section 6(b)(5) of the Act,49 which
requires, among other things, that the
Exchange’s rules 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.
48 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
49 15 U.S.C. 78f(b)(5).
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A. Proposed Nasdaq Rule 5704
As an initial matter, the Commission
notes that the Exchange currently has
generic listing standards for Index Fund
Shares, Managed Fund Shares, and
Portfolio Depositary Receipts,50 and
therefore proposed Rule 5704 would not
permit the Exchange to generically list
any novel product types. The
Commission also notes that a number of
the provisions of proposed Rule 5704
are substantively identical to provisions
of other Nasdaq listing rules.51
The Commission believes that
proposed Nasdaq Rule 5704 is
reasonably designed to help prevent
fraudulent and manipulative acts and
practices. A central qualification for
listing under the proposed rule is
ongoing compliance with Rule 6c–11
under the 1940 Act, which requires,
among other things, ETFs to
prominently disclose the portfolio
holdings that will form the basis for
each calculation of net asset value per
share.52 Because initial and ongoing
compliance with Rule 6c–11 of the 1940
Act is a condition for listing and trading
on the Exchange, the proposed rule
would permit Nasdaq to list and trade
shares of an investment company with
a fully transparent portfolio,53 and the
Commission believes that portfolio
transparency should help prevent
manipulation of the price of Exchange
Traded Fund Shares.54 Additionally,
proposed Nasdaq Rule 5704 includes
requirements relating to fire walls and
procedures to prevent the use and
dissemination of material, non-public
information regarding the applicable
ETF index and portfolio,55 all such
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50 See
Nasdaq Rules.
51 See supra notes 15, 19, 20, and 28 and
accompanying text, respectively.
52 See Adopting Release, supra note 10, at 57180–
81.
53 See supra note 9. The Commission also noted
that, with respect to ETF portfolio transparency, the
disclosures are designed to promote an effective
arbitrage mechanism and inform investors about the
risks of deviation between market price and net
asset value when deciding whether to invest in
ETFs generally or in a particular ETF. See Adopting
Release, supra note 10, at 57166.
54 See Adopting Release, supra note 10, at 57169
(concluding that portfolio transparency combined
with existing requirements should be sufficient to
protect against certain abuses).
55 For example, proposed Nasdaq Rule
5704(b)(1)(B)(i) states that if the investment adviser
to an ETF is affiliated with a broker-dealer, such
investment adviser will erect and maintain a ‘‘fire
wall’’ between the investment adviser and the
broker-dealer with respect to access to information
concerning the composition and/or changes to the
underlying portfolio. In addition, personnel who
make decisions on the ETF’s portfolio composition
must be subject to procedures designed to prevent
the use and dissemination of material nonpublic
information regarding the applicable ETF portfolio.
Proposed Nasdaq Rule 5704(b)(1)(B)(ii) states that
the Reporting Authority that provides the ETF’s
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requirements of which are designed to
prevent fraudulent and manipulative
acts and practices.56 The Commission
specifically notes that certain of these
requirements relating to such fire walls
and procedures, which are substantively
identical to Nasdaq’s rules governing
the listing and trading of index-based
and actively managed ETFs, apply in
addition to what is already required
under the Act and the 1940 Act and
respective rules and regulations
thereunder, and the Commission
believes that such requirements
collectively provide additional
protections against the potential misuse
of material, non-public information.
Therefore, the Commission concludes
that the proposed requirements relating
to such fire walls and procedures,
combined with ETF portfolio
transparency and the existing
requirements under the Act and 1940
Act, should help to protect against
fraudulent and manipulative acts and
practices under Section 6(b)(5) of the
Act.
Proposed Nasdaq Rule 5704(c)
requires that the Exchange implement
and maintain written surveillance
procedures for Exchange Traded Fund
Shares. The Exchange will employ its
existing surveillance procedures to
trading in Exchange Traded Fund
Shares, and represents that its
surveillance procedures are adequate to
(a) properly monitor the trading of such
securities during all trading sessions
and (b) deter and detect violations of
Exchange rules and the applicable
federal securities laws.57 Further, the
portfolio must implement and maintain, or be
subject to, procedures designed to prevent the use
and dissemination of material non-public
information regarding the actual components of the
portfolio. Proposed Nasdaq Rule 5704(b)(1)(B)(iii)
states that if the index underlying a series of
Exchange Traded Fund Shares is maintained by a
broker-dealer or fund adviser, the broker-dealer or
fund adviser shall erect and maintain a ‘‘fire wall’’
around the personnel who have access to
information concerning changes and adjustments to
the index and the index will be calculated by a
third party who is not a broker-dealer or fund
adviser. Additionally, proposed Nasdaq Rule
5704(b)(1)(B)(iv) states that any advisory committee,
supervisory board, or similar entity that advises a
Reporting Authority or that makes decisions on the
index composition, methodology and related
matters, must implement and maintain, or be
subject to, procedures designed to prevent the use
and dissemination of material non-public
information regarding the applicable index. See
generally proposed Nasdaq Rule 5704(b)(1)(B).
56 In adopting Rule 6c–11, the Commission
determined that the safeguards in the existing
regulatory regime adequately address ‘‘special
concerns that self-indexed ETFs present, including
the potential ability of an affiliated index provider
to manipulate an underlying index to the benefit or
detriment of a self-indexed ETF.’’ Adopting Release,
supra note 10, 84 FR at 57168.
57 The Commission also finds that the proposed
rule change, as modified by Amendment No. 4, is
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Exchange represents that it, or FINRA
on behalf of the Exchange, will
communicate as needed regarding
trading in Exchange Traded Fund
Shares and certain of their applicable
underlying components with other
markets that are members of the ISG or
with which Nasdaq has a CSSA in
place. The Exchange represents that its
surveillance procedures for monitoring
compliance with Rule 6c–11 under the
1940 Act will be consistent with the
manner in which the Exchange
conducts its trading surveillance for
ETFs. The Exchange will require issuers
of Exchange Traded Fund Shares listed
under proposed Nasdaq Rule 5704 to
notify the Exchange of instances of noncompliance. Additionally, the Exchange
will require periodic certifications from
the issuer that it has maintained
compliance with Rule 6c–11, and
Nasdaq will also check the ETF’s
website on a periodic basis for the
inclusion of proper disclosure in
compliance with Rule 6c–11. Finally,
proposed Nasdaq Rule 5704(b)(2)(b)
requires that the Exchange delist a series
of Exchange Traded Fund Shares if,
following the initial 12-month period
after commencement of trading, there
are fewer than 50 beneficial holders of
such series.
Consistent with the requirement of
Section 6(b)(5) of the Act 58 that the
Exchange’s rules be designed to remove
impediments to and perfect the
mechanism of a free and open market,
the Exchange’s rules regarding trading
halts will help to ensure the
maintenance of fair and orderly markets
for Exchange Traded Fund Shares.
Specifically, as discussed above, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in a series of
Exchange Traded Fund Shares. Nasdaq
states that trading in Exchange Traded
Fund Shares will be halted if the circuit
breaker parameters in Nasdaq Rule 4120
have been reached or when the
Exchange becomes aware that the net
asset value for a series of Exchange
Traded Fund Shares is not being
disseminated to all market participants
consistent with Section 6(b)(1) of the Act, which
requires (among other things) that a national
securities exchange be organized and have the
capacity to comply with its own rules. The
Exchange represents that it will: (1) Monitor for
compliance with Rule 6c–11 to ensure that the
continued listing standards are being met; (2)
periodically review the website of series of
Exchange Traded Fund Shares to ensure that the
requirements of Rule 6c–11 are being met; (c) obtain
a representation from each issuers of a series of
Exchange Traded Fund Shares that the
requirements of proposed Nasdaq Rule 5704 will be
satisfied.
58 15 U.S.C. 78f(b)(5).
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at the same time.59 Additionally, trading
may be halted because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
Exchange Traded Fund Shares
inadvisable. As Nasdaq represents in the
proposal, examples of such market
conditions or reasons may be: (1) If the
value of the index or portfolio of
securities on which the series of
Exchange Traded Fund Shares is based
is no longer calculated or available or an
interruption to the dissemination
persists past the trading day in which it
occurred; (2) when certain information
about the Exchange Traded Fund Shares
that is required to be disclosed under
Rule 6c–11 of the 1940 Act is not being
made available; (3) if trading in the
underlying securities comprising the
index or portfolio applicable to such
series of Exchange Traded Fund Shares
has been halted; (4) if Nasdaq becomes
aware that the net asset value for a
series of Exchange Traded Fund Shares
is not being disseminated to all market
participants at the same time; or (5) in
the presence of other unusual
conditions or circumstances detrimental
to the maintenance of a fair and orderly
market. Further, Nasdaq will employ
intraday alerts, which will notify
Exchange personnel of unusual trading
activity throughout the day that could
be indicative of unusual conditions or
circumstances that could be detrimental
to the maintenance of a fair and orderly
market.60
B. Discontinuance of Quarterly Reports
of Generically Listed Managed Fund
Shares
In support of its proposal to adopt
generic listing standards for Managed
Fund Shares, the Exchange proposed to
submit quarterly reports to the
Commission disclosing certain
information.61 These reports were
designed to identify problems
associated with generically listed
Managed Fund Shares. In adopting Rule
6c–11 under the 1940 Act, the
Commission largely eliminated prior
distinctions between actively managed
and index-based ETFs, and Nasdaq does
not submit quarterly reports regarding
the shares of index-based ETFs that it
generically lists. In addition, the
Commission recognizes that, since the
adoption of the Managed Fund Shares
generic listing standards, the
marketplace for ETFs has matured and
developed, an increased number of
actively managed ETFs have been listed
supra note 22 and accompanying text.
Amendment No. 4, supra note 8, at 26.
61 The information included in these reports is
summarized above. See supra note 32.
and are trading on national securities
exchanges, and market participants have
become more familiar with such
securities. Moreover, proposed Nasdaq
Rule 5704(c) requires Nasdaq to
implement and maintain written
surveillance procedures for Exchange
Traded Fund Shares.62 The Exchange
represents that it intends to utilize its
existing surveillance procedures
applicable to equity securities, which
will include Exchange Traded Fund
Shares, to monitor trading in the
Exchange Traded Fund Shares, and will
perform ongoing surveillance of
Exchange Traded Fund Shares listed on
the Exchange in order to ensure
compliance with Rule 6c–11 and the
1940 Act on an ongoing basis. The
Commission notes that manipulation
concerns are mitigated by a combination
of the Exchange’s surveillance
procedures, Nasdaq’s ability to halt
trading under proposed Nasdaq Rule
5704, Nasdaq Rules 4120(a)(9) and
4120(a)(10), and the Exchange’s ability
to commence delisting proceedings
under proposed Nasdaq Rule
5704(b)(2)(B). In light of these reasons,
as well as the Commission’s experience
with the quarterly reports, the
Commission believes that this proposal
is consistent with Section 6(b)(5) of the
Act, and it therefore finds that it is no
longer necessary for Nasdaq to continue
to submit such quarterly reports.
C. Other Related Rule Changes
The Exchange proposes to incorporate
Exchange Traded Fund Shares into the
definitions of ‘‘Exchange Traded
Derivative Securities’’ in Nasdaq Rule
5735(c)(6) and ‘‘Derivative Securities
Products’’ in Nasdaq Rule
5705(b)(3)(A)(i) so that the exclusions
applicable to those defined terms also
will apply to Exchange Traded Fund
Shares. The Exchange also proposes to
amend Nasdaq Rule 4120 to incorporate
Exchange Traded Fund Shares into
Nasdaq Rules 4120(a)(9) and 4120(a)(10)
so that these trading halt rules will
apply to Exchange Traded Fund Shares
listed on Nasdaq and traded on Nasdaq
pursuant to unlisted trading privileges.
Lastly, the Exchange proposes to
incorporate Exchange Traded Fund
Shares into the definition of ‘‘Derivative
Securities’’ in Nasdaq Rule 5615 so that
exemptions from certain corporate
governance requirements will be
applicable to Exchange Traded Fund
Shares. The Exchange states that these
changes will subject Exchange Traded
Fund Shares to the same requirements
59 See
60 See
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62 Moreover, Nasdaq Rule 5735(b)(4) requires that
the Exchange implement and maintain written
surveillance procedures for Managed Fund Shares.
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currently applicable to other 1940 Actregistered investment company
securities (i.e., Index Fund Shares,
Managed Fund Shares, and Portfolio
Depositary Receipts).
The Commission believes that these
proposed changes simply incorporate
proposed Rule 5704 into the existing
framework of Nasdaq’s rules, and
therefore finds that such changes are
consistent with Section 6(b)(5) of the
Act.
D. Exchange Representations
In support of this proposal, the
Exchange has made the following
representations:
(1) Nasdaq deems Exchange Traded
Fund Shares to be equity securities, thus
rendering trading in Exchange Traded
Fund Shares subject to the Exchange’s
existing rules governing the trading of
equity securities.63 The Exchange notes
that Exchange Traded Fund Shares will
be subject to rules governing Exchange
member disclosure obligations in
connection with equities trading, and
that Rule 6c–11 does not change the
applicability of these Exchange rules
with respect to these securities.64
(2) Nasdaq will (a) monitor for
compliance with Rule 6c–11 to ensure
that the continued listing standards are
being met; (b) periodically review the
website of series of Exchange Traded
Fund Shares to ensure that the
requirements of Rule 6c–11 are being
met; and (c) employ intraday alerts that
will notify Exchange personnel of
unusual trading activity throughout the
day that could be indicative of unusual
conditions or circumstances that could
be detrimental to the maintenance of a
fair and orderly market.65
(3) Nasdaq will obtain a
representation from the ETF that the net
asset value per share for each series of
63 See
Amendment No. 4, supra note 8, at 29.
respect to trading in Exchange Traded
Fund Shares, the Exchange represents that all of the
Nasdaq member obligations relating to product
description and prospectus delivery requirements
will continue to apply in accordance with the
Exchange rules and federal securities laws, and
Nasdaq will continue to monitor its members for
compliance with such requirements, which are not
changing as a result of Rule 6c–11 under the 1940
Act.
65 See Amendment No. 4, supra note 8, at 14. The
Exchange also notes that Nasdaq Rule 5701(d)
would require an issuer of Exchange Traded Fund
Shares to notify Nasdaq promptly after the issuer
becomes aware of any non-compliance with the
requirements of the Nasdaq Rule 5700 Series, which
would encompass any failure of the issuer to
comply with Rule 6c–11 or the 1940 Act. Failure
by an issuer to notify the Exchange of noncompliance pursuant to Nasdaq Rule 5701(d) would
itself be considered non-compliance with the
requirements of the Nasdaq Rule 5700 Series and
subject to potential trading halts and the delisting
process in the Nasdaq Rule 5800 Series.
64 With
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Exchange Traded Fund Shares will be
calculated daily and will be made
available to all market participants at
the same time. Nasdaq will also obtain
a representation from the issuers of each
series of Exchange Traded Fund Shares
that the requirements of proposed
Nasdaq Rule 5704 will be satisfied.66
(4) Nasdaq’s surveillance procedures
are adequate to properly monitor the
trading of the Exchange Traded Fund
Shares in all trading sessions and to
deter and detect violations of Exchange
rules and applicable federal securities
laws.67
(5) The Exchange, or FINRA on behalf
of the Exchange, will communicate as
needed regarding trading in Exchange
Traded Fund Shares and certain of their
applicable underlying components with
other markets that are members of the
ISG or with which Nasdaq has in place
a CSSA. Additionally, FINRA, on behalf
of the Exchange, is able to access, as
needed, trade information for certain
fixed income securities that may be held
by a series of Exchange Traded Fund
Shares reported to TRACE. FINRA also
can access data obtained from the
EMMA system relating to municipal
bond trading activity for surveillance
purposes in connection with trading in
a series of Exchange Traded Fund
Shares, to the extent that a series of
Exchange Traded Fund Shares holds
municipal securities.68
(6) Each issuer of a series of Exchange
Traded Fund Shares will be required to
comply with Rule 10A–3 under the Act
(17 CFR 240.10A–3) for the initial and
continued listing of Exchange-Traded
Fund Shares.69
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
Amendment No. 4. For the foregoing
reasons, the Commission finds that the
proposed rule change, as modified by
Amendment No. 4, is consistent with
Sections 6(b)(1) and 6(b)(5) of the Act 70
and the rules and regulations
thereunder applicable to a national
securities exchange.
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IV. Solicitation of Comments to the
Proposed Rule Change, as Modified by
Amendment No. 4
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 4 to the proposed rule
change is consistent with the Act.
66 See
id. at 15, n.20.
id. at 14–15.
68 See id. at 15.
69 See id.
70 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5),
respectively.
67 See
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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 rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2019–090 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–NASDAQ–090. 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
10:00 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–NASDAQ–2019–090, and
should be submitted on or before April
30, 2020.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 4
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 4, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 4 in the Federal
Register. In Amendment No. 4, the
Exchange (among other things): (1)
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Sfmt 4703
Modified the circumstances in which it
will commence delisting of, and
consider suspending trading in, a series
of Exchange Traded Fund Shares; (2)
broadened its undertakings with respect
to ensuring compliance with the
proposed generic listing standard; and
(3) clarified that Exchange Traded Fund
Shares would be subject to all Exchange
rules applicable to equities trading,
including rules governing Exchange
member disclosure obligations.
Amendment No. 4 also provides other
clarifications and additional
information in support of the proposed
rule change.71 These changes, as well as
additional information in Amendment
No. 4, assisted the Commission in
finding that the proposal is consistent
with the Act. Accordingly, the
Commission finds good cause, pursuant
to Section 19(b)(2) of the Act,72 to
approve the proposed rule change, as
modified by Amendment No. 4, on an
accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 73 that the
proposed rule change (SR–NASDAQ–
2019–090), as modified by Amendment
No. 4, be, and it hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.74
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–07440 Filed 4–8–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88553; File No. SR–
CboeEDGX–2020–014]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Expand the
Trading Hours Applicable to Managed
Portfolio Shares To Include All Trading
Sessions
April 3, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 31,
2020, Cboe EDGX Exchange, Inc.
(‘‘Exchange’’ or ‘‘EDGX’’) filed with the
71 See
72 15
Amendment No. 4, supra note 8.
U.S.C. 78s(b)(2).
73 Id.
74 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\09APN1.SGM
09APN1
]]>Agencies
[Federal Register Volume 85, Number 69 (Thursday, April 9, 2020)]
[Notices]
[Pages 19984-19994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07440]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88561; File No. SR-NASDAQ-2019-090]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Amendment No. 4 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 4, To
Adopt Nasdaq Rule 5704 Governing the Listing and Trading of Exchange
Traded Fund Shares
April 3, 2020.
On November 8, 2019, The Nasdaq Stock Market LLC (``Exchange'' or
``Nasdaq'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC), 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, among other things, adopt new
Nasdaq Rule 5704 to list and trade Exchange Traded Fund Shares. The
proposed rule change was published for comment in the Federal Register
on November 22, 2019.\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. 87559 (November 18,
2019), 84 FR 64574.
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On December 17, 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 disapprove the proposed rule
change.\5\ On February 6, 2020, the Exchange filed Amendment No. 1 to
the proposed rule change, which amended and replaced the proposed rule
change in its entirety.\6\ On February 20, 2020, the Commission
published the proposed rule change, as modified by Amendment No. 1, for
notice and comment and instituted proceedings to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1.\7\ On March 3, 2020, March 17, 2020, and March 19,
2020, the Exchange filed Amendments No. 2, No. 3, and No. 4 to the
proposed rule change, respectively.\8\ The Commission has received no
comment letters on the proposed rule change.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 87776, 84 FR 70610
(December 23, 2019).
\6\ See infra note 8.
\7\ See Securities Exchange Act Release No. 88207 (February 13,
2020), 85 FR 9879.
\8\ Each of Amendments No. 2, 3, and 4 amended and replaced the
proposed rule change, as modified by the prior amendment, in its
entirety. All amendments to the proposed rule change are available
on the Commission's website at: https://www.sec.gov/comments/sr-nasdaq-2019-090/srnasdaq2019090.htm.
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The Commission is publishing this notice to solicit comments on
Amendment No. 4 to the proposed rule change from interested persons,
and is approving the proposed rule change, as modified by Amendment No.
4, on an accelerated basis.
I. Exchange's Description of the Proposal, as Modified by Amendment No.
4
The Exchange proposes to adopt new Nasdaq Rule 5704 to list and
trade shares of securities issued by an exchange-traded fund as defined
herein, as well as amendments to Nasdaq Rule 4120 (Limit Up-Limit Down
Plan and Trading Halts) and Nasdaq Rule 5615 (Exemptions from Certain
Corporate Governance Requirements), Nasdaq Rule 5705(b) (Index Fund
Shares), Nasdaq Rule 5735 (Managed Fund Shares), and to discontinue the
quarterly reports currently required with respect to Managed Fund
Shares under Nasdaq Rule 5735(b). This Amendment No. 4 replaces and
supersedes the original filing and Amendments No. 1, No. 2 and No. 3 in
their entirety.
The text of the proposed rule change is available on the Exchange's
website at https://nasdaq.cchwallstreet.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 Exchange 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 these 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 aspects 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 proposes Nasdaq Rule 5704 to establish generic listing
standards that permit the listing and trading of shares (``Exchange
Traded Fund Shares'') of exchange-traded funds (``ETFs'' as defined
below) that meet the criteria established by the Commission in its
adoption of Rule 6c-11 \9\ (``Rule 6c-11'') under the Investment
Company Act of 1940, as amended (``1940 Act''), to operate without
obtaining an exemptive order from the SEC under the 1940 Act.\10\ This
will help to accomplish the SEC's goal in adopting Rule 6c-11 to allow
such ETFs to come directly to market without the cost and delay of
obtaining exemptive relief while still protecting the interests of
investors and other market participants. Rule 6c-11 will provide
exemptions applicable to both index-based and transparent actively
managed ETFs. Rule 6c-11 will enhance the regulatory framework through
streamlining existing procedures and reducing the costs and time frames
associated with bringing ETFs to market. This, in turn, will also serve
to enhance competition among ETF issuers and ultimately reduce investor
costs.\11\
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\9\ Specifically, Rule 6c-11 applies to open-end funds that (i)
issue and redeem creation units to and from authorized participants
in exchange for a basket of securities and other assets (and any
cash balancing amount), and (ii) whose shares are listed on a
national securities exchange and trade at market-determined prices.
Rule 6c-11 does not apply to leveraged, inverse, non-transparent,
share classes, or exchange-traded funds structured as unit
investment trusts.
\10\ See Release No. 33-10695; IC-33646; File No. S7-15-18
(Exchange-Traded Funds) (September 25, 2019), 84 FR 57162 (October
24, 2019) (``Adopting Release'').
\11\ The SEC said in the Adopting Release that Rule 6c-11 ``will
modernize the regulatory framework for ETFs to reflect our more than
two decades of experience with these investment products. The rule
is designed to further important Commission objectives, including
establishing a consistent, transparent, and efficient regulatory
framework for ETFs and facilitating greater competition and
innovation among ETFs.'' See Adopting Release at 57163. The SEC also
said that in reference to the impact of Rule 6c-11 that: ``We
believe rule 6c-11 will establish a regulatory framework that: (1)
Reduces the expense and delay currently associated with forming and
operating certain ETFs unable to rely on existing orders; and (2)
creates a level playing field for ETFs that can rely on the rule. As
such, the rule will enable increased product competition among
certain ETF providers, which can lead to lower fees for investors,
encourage financial innovation, and increase investor choice in the
ETF market.'' See Adopting Release at 57204.
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[[Page 19985]]
Nasdaq believes that the proposed generic listing rules for
Exchange Traded Fund Shares, described below, will facilitate efficient
procedures for ETFs that are permitted to operate in reliance on Rule
6c-11. The Exchange also believes that proposed Nasdaq Rule 5704 is
consistent with, and will further, the Commission's goals in adopting
Rule 6c-11. Exchange Traded Fund Shares that are permitted to operate
in reliance on Rule 6c-11 will be permitted to be listed and traded on
the Exchange without a prior Commission approval order or notice of
effectiveness pursuant to Section 19(b) of the Act. This will
significantly reduce the time frame and costs associated with bringing
Exchange Traded Fund Shares to market, which, in turn, will promote
competition among issuers of Exchange Traded Fund Shares, to the
benefit of investors.
Nasdaq will notify the Commission through the filing of a Form 19b-
4(e) when an ETF lists on Nasdaq pursuant to proposed Nasdaq Rule 5704.
The Form 19b-4(e) will identify the Nasdaq rule under which the ETF is
being generically listed. The Exchange will retain its right to file a
Form 19b-4 under Nasdaq Rule 5705(b) and Nasdaq Rule 5735,
respectively, for the listing and trading of Index Fund Shares or
Managed Fund Shares. Additionally, Nasdaq will also file a Form 19b-
4(e) for ETFs that decide to switch from operating under Nasdaq rules
other than proposed Nasdaq Rule 5704 to operating in compliance with
Rule 6c-11 and in conformity with proposed Nasdaq Rule 5704.
The Exchange also proposes to amend Nasdaq Rule 4120 (Limit Up-
Limit Down Plan and Trading Halts) and Nasdaq Rule 5615 (Exemptions
from Certain Corporate Governance Requirements), Nasdaq Rule 5705(b)
(Index Fund Shares), Nasdaq Rule 5735 (Managed Fund Shares), and to
discontinue the quarterly reports currently required with respect to
Managed Fund Shares under Nasdaq Rule 5735(b).
Proposed Nasdaq Rule 5704 will enable ETFs, whether index-based or
actively managed, to qualify for listing and trading on the Exchange
both on an initial and continued basis by meeting and maintaining
compliance with the criteria set forth in Rule 6c-11.\12\ The specific
provisions of proposed Nasdaq Rule 5704 are presented below, as well as
amendments to Nasdaq Rule 4120 (Limit Up-Limit Down Plan and Trading
Halts), Nasdaq Rule 5615 (Exemptions from Certain Corporate Governance
Requirements), Nasdaq Rule 5705(b) (Index Fund Shares), and Nasdaq Rule
5735 (Managed Fund Shares), which would be necessitated by adoption of
the proposed rule. Additionally, the proposed rule change to
discontinue the quarterly reports currently required with respect to
Managed Fund Shares under Nasdaq Rule 5735(b) is also discussed below.
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\12\ Rule 6c-11 is now effective so Exchange Traded Fund Shares
that are permitted to operate in reliance on Rule 6c-11 would be
eligible for listing and trading on Nasdaq under proposed Nasdaq
Rule 5704.
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Proposed Nasdaq Rule 5704
Proposed Definitions
Proposed Nasdaq Rule 5704(a)(1)(A) defines the term ``Exchange
Traded Fund'' (``ETF'') as having the same meaning as the term
``exchange-traded fund'' as defined in Rule 6c-11.\13\ In the case of
an ETF that is not currently listed on a national securities exchange,
the portion of the definition found in Rule 6c-11 requiring such
listing will become applicable if the ETF is listed on a national
securities exchange.
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\13\ Rule 6c-11(a)(1) defines ``exchange-traded fund'' as a
registered open-end management company: (i) That issues (and
redeems) creation units to (and from) authorized participants in
exchange for a basket and a cash balancing amount if any; and (ii)
Whose shares are listed on a national securities exchange and traded
at market-determined prices. The terms ``authorized participant,''
``basket'' and ``creation unit'' are defined in Rule 6c-11(a)(1).
---------------------------------------------------------------------------
Proposed Nasdaq Rule 5704(a)(1)(B) defines the term ``Exchange
Traded Fund Share'' as having the same meaning as the term is defined
as having in Rule 6c-11.\14\
---------------------------------------------------------------------------
\14\ Rule 6c-11(a)(1) defines ``exchange-traded fund share'' as
a share of stock issued by an exchange-traded fund.
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Proposed Nasdaq Rule 5704(a)(1)(C) defines the term ``Reporting
Authority'' in respect of a particular series of Exchange Traded Fund
Shares to mean Nasdaq, a wholly-owned subsidiary of Nasdaq, or an
institution or reporting service designated by Nasdaq or its subsidiary
as the official source for calculating and reporting information
relating to such series, including, but not limited to, any current
index or portfolio value; the current value of the portfolio of any
securities required to be deposited in connection with issuance of
Exchange Traded Fund Shares; the amount of any dividend equivalent
payment or cash distribution to holders of Exchange Traded Fund Shares,
net asset value, and other information relating to the issuance,
redemption or trading of Exchange Traded Fund Shares.\15\ The
definition also notes that it does not imply that an institution or
reporting service that is the source for calculating and reporting
information relating to Exchange Traded Fund Shares must be designated
by Nasdaq or its subsidiary; the term ``Reporting Authority'' does not
refer to an institution or reporting service not so designated.
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\15\ The proposed definition of ``Reporting Authority'' is
substantively identical to the definition for this term in Nasdaq
Rule 5705(b)(1)(C) (Index Fund Shares) and in Nasdaq Rule 5735(c)(4)
(Managed Fund Shares).
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Initial and Continued Listing.\16\ Proposed Nasdaq Rule 5704(b)
states that Nasdaq may approve a series of Exchange Traded Fund Shares
for listing and trading pursuant to Rule 19b-4(e) under the Act,
provided each series of Exchange Traded Fund Shares is eligible to
operate in reliance on Rule 6c-11 and satisfies the requirements of
Rule 5704 on an initial and continued listing basis.\17\
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\16\ Nasdaq may list and trade a series of Exchange Traded Fund
Shares based on one or more foreign or domestic indexes or
portfolios. Each series of Exchange Traded Fund Shares based on each
particular index or portfolio, or combination thereof, will be
designated as a separate series and will be identified by a unique
symbol. The components that are included in an index or portfolio on
which a series of Exchange Traded Fund Shares is based will be
selected by such person, which may be Nasdaq or an agent or wholly-
owned subsidiary thereof, as will have authorized use of such index
or portfolio. Such index or portfolio may be revised from time to
time as may be deemed necessary or appropriate to maintain the
quality and character of the index or portfolio.
\17\ Rule 6c-11(c) sets forth certain conditions applicable to
exchange-traded funds, and specifies the information required to be
disclosed prominently on the fund's website free of charge,
including the following: (i) Before the opening of regular trading
on the primary listing exchange of the exchange-traded fund shares,
the estimated cash balancing amount (if any) and the following
information (as applicable) for each portfolio holding that will
form the basis of the next calculation of current net asset value
per share: (A) Ticker symbol; (B) CUSIP or other identifier; (C)
Description of holding; (D) Quantity of each security or other asset
held; and (E) Percentage weight of the holding in the portfolio;
(ii) The exchange-traded fund's current net asset value per share,
market price, and premium or discount, each as of the end of the
prior business day; (iii) A table showing the number of days the
exchange-traded fund's shares traded at a premium or discount during
the most recently completed calendar year and the most recently
completed calendar quarters since that year (or the life of the
exchange-traded fund, if shorter); (iv) A line graph showing
exchange-traded fund share premiums or discounts for the most
recently completed calendar year and the most recently completed
calendar quarters since that year (or the life of the exchange-
traded fund, if shorter); (v) The exchange-traded fund's median bid-
ask spread, expressed as a percentage rounded to the nearest
hundredth (and computed in a manner described in Rule 6c-11(c)(v)(A)
through (D)); and (vi) If the exchange-traded fund's premium or
discount is greater than 2% for more than seven consecutive trading
days, a statement that the exchange-traded fund's premium or
discount, as applicable, was greater than 2% and a discussion of the
factors that are reasonably believed to have materially contributed
to the premium or discount, which must be maintained on the website
for at least one year thereafter. Rule 6c-11(c)(4) provides that the
exchange-traded fund may not seek, directly or indirectly, to
provide investment returns that correspond to the performance of a
market index by a specified multiple, or to provide investment
returns that have an inverse relationship to the performance of a
market index, over a predetermined period of time.
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[[Page 19986]]
Proposed Nasdaq Rule 5704(b)(1) says that each series of Exchange
Traded Fund Shares must also satisfy the follow criteria on an initial
and continued listing (except for paragraph (A) below) basis:
Proposed Nasdaq Rule 5704(b)(1)(A) states that for each series of
Exchange Traded Fund Shares, Nasdaq will establish a minimum number of
Exchange Traded Fund Shares required to be outstanding at the time of
commencement of trading on Nasdaq.\18\
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\18\ Nasdaq will generally consider at least one creation unit
outstanding at the time of listing to be sufficient for the purposes
of complying with this requirement.
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Proposed Nasdaq Rule 5704(b)(1)(B) sets forth the requirements
regarding index calculation and dissemination that must be satisfied on
both an initial and continued listing basis. Proposed Nasdaq Rule
5704(b)(1)(B)(i) states that if the investment adviser to an ETF is
affiliated with a broker-dealer, such investment adviser will erect and
maintain a ``fire wall'' between the investment adviser and the broker-
dealer with respect to access to information concerning the composition
and/or changes to the underlying portfolio. Additionally, personnel who
make decisions on the ETF's portfolio composition must be subject to
procedures designed to prevent the use and dissemination of material
nonpublic information regarding the applicable ETF portfolio. Proposed
Nasdaq Rule 5704(b)(1)(B)(ii) states that the Reporting Authority that
provides the ETF's portfolio must implement and maintain, or be subject
to, procedures designed to prevent the use and dissemination of
material non-public information regarding the actual components of the
portfolio. Proposed Nasdaq Rule 5704(b)(1)(B)(iii) states that if the
index underlying a series of Exchange Traded Fund Shares is maintained
by a broker-dealer or fund adviser, the broker-dealer or fund adviser
shall erect and maintain a ``fire wall'' around the personnel who have
access to information concerning changes and adjustments to the index
and the index will be calculated by a third party who is not a broker-
dealer or fund adviser. Proposed Nasdaq Rule 5704(b)(1)(B)(iv) states
that any advisory committee, supervisory board, or similar entity that
advises a Reporting Authority or that makes decisions on the index
composition, methodology and related matters, must implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the
applicable index.\19\
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\19\ The proposed requirements are substantively identical to
those included in Nasdaq Rule 5705(b) (Index Fund Shares) and in
Nasdaq Rule 5735 (Managed Fund Shares).
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Proposed Nasdaq Rule 5704(b)(1)(C) states that regular market
session trading will occur between 9:30 a.m. and either 4:00 p.m. or
4:15 p.m. for each series of Exchange Traded Fund Shares, as specified
by Nasdaq. In addition, Nasdaq may designate a series of Exchange
Traded Fund Shares for trading during a pre-market session beginning at
4:00 a.m. and/or a post-market session ending at 8:00 p.m.
Proposed Nasdaq Rule 5704(b)(1)(D) states that the minimum price
variation for quoting and entry of orders in Exchange Traded Fund
Shares is $0.01.\20\
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\20\ The proposed minimum price variation for quoting and entry
of orders is substantively identical to the requirement included in
Nasdaq Rule 5745(b)(3) (Exchange-Traded Managed Fund Shares
(``NextShares'')).
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Proposed Nasdaq Rule 5704(b)(2) sets forth the circumstances under
which Nasdaq will consider the suspension of trading and removal in,
and will initiate delisting proceedings under the Nasdaq Rule 5800
Series of, a series of Exchange Traded Fund Shares. These circumstances
will include the following: (i) Proposed Nasdaq Rule 5704(b)(2)(A)
states that if Nasdaq becomes aware that the series of Exchange Traded
Fund Shares is no longer eligible to operate in reliance on Rule 6c-11;
(ii) Proposed Nasdaq Rule 5704(b)(2)(B) states that if, following the
initial twelve month period after commencement of trading on Nasdaq of
the series of Exchange Traded Fund Shares, there are fewer than 50
beneficial holders; (iii) Proposed Nasdaq Rule 5704(b)(2)(C) states
that if any of the other requirements set forth in this rule are not
continuously maintained; or (iv) Proposed Nasdaq Rule 5704(b)(2)(D)
states that if such other event will occur or condition exists which in
the opinion of Nasdaq, makes further dealings on Nasdaq
inadvisable.\21\
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\21\ Nasdaq may also submit a separate rule filing under Section
19(b) of the Act to permit the listing and trading of a series of
Exchange Traded Fund Shares. If Nasdaq submits such a rule filing,
any of the statements or representations regarding (a) the index
composition; (b) the description of the portfolio; (c) limitations
on portfolio holdings or reference assets; (d) dissemination and
availability of the index, portfolio information, or intraday
indicative values; or (e) the applicability of Nasdaq listing rules
specified in such proposals are not continuously maintained, will
constitute continued listing standards with respect to that series
of Exchange Traded Fund Shares.
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With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in a series of Exchange Traded Fund Shares. Trading in Exchange
Traded Fund Shares will be halted if the circuit breaker parameters in
Nasdaq Rule 4120 have been reached. Trading also may be halted because
of market conditions or for reasons that, in the view of the Exchange,
make trading in Exchange Traded Fund Shares inadvisable. An example of
such an event as mentioned above in proposed Nasdaq Rule 5704(b)(2)(D)
would include if the value of the index or portfolio of securities on
which the series of Exchange Traded Fund Shares is based is no longer
calculated or available or an interruption to the dissemination
persists past the trading day in which it occurred. Another example
includes the extent to which certain information about the Exchange
Traded Fund Shares that is required to be disclosed under Rule 6c-11 of
the 1940 Act is not being made available.
The Exchange will also halt trading if it becomes aware that the
net asset value for a series of Exchange Traded Fund Shares is not
being disseminated to all market participants at the same time.\22\ In
addition, as proposed herein, Nasdaq may halt trading in Exchange
Traded Fund Shares if trading in the underlying securities compromising
[sic] the index or portfolio applicable to such series of Exchange
Traded Fund Shares has been halted in the primary market(s), or if
trading has ceased in securities underlying the index or portfolio, or
in the presence of other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market.\23\
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\22\ See Nasdaq Rule 4120(a)(10). Nasdaq may resume trading once
the net asset value becomes available to all market participants.
\23\ See Proposed Nasdaq Rule 4120(a)(9).
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Proposed Nasdaq Rule 5704(c) states that Nasdaq will implement and
maintain written surveillance procedures for Exchange Traded Fund
Shares. The Exchange believes that the proposal is designed to prevent
fraudulent and manipulative acts and practices because the Exchange
will perform ongoing surveillance of Exchange Traded Fund Shares listed
on
[[Page 19987]]
the Exchange in order to ensure compliance with Rule 6c-11 and the 1940
Act on an ongoing basis. Nasdaq believes that the manipulation concerns
that such standards are intended to address are otherwise mitigated by
a combination of the Exchange's surveillance procedures, Nasdaq's
ability to halt trading under the proposed Rule Nasdaq Rule 4120(a)(9),
Nasdaq Rule 4120(a)(10), and the Exchange's ability to suspend trading
and commence delisting proceedings under proposed Nasdaq Rule
5704(b)(2)(B). As previously stated, Nasdaq is proposing to amend
Nasdaq Rule 4120(b)(4)(A) to clarify that Exchange Traded Fund Shares
are subject to Nasdaq's halt authority.
Nasdaq also believes that such concerns are further mitigated by
enhancements to the arbitrage mechanism that will come from compliance
with Rule 6c-11, specifically the additional flexibility provided to
issuers of Exchange Traded Fund Shares through the use of custom
baskets for creations and redemptions and the additional information
made available to the public through the additional disclosure
obligations.\24\ The Exchange believes that the combination of these
factors will act to keep Exchange Traded Fund Shares trading near the
value of their underlying holdings and further mitigate concerns around
manipulation of Exchange Traded Fund Shares on Nasdaq.
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\24\ The Exchange notes that the Commission came to a similar
conclusion in several places in the Rule 6c-11 Release. See Adopting
Release at 15-18; 60-61; 69-70; 78-79; 82-84; and 95-96.
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The Exchange will monitor for compliance with Rule 6c-11 to ensure
that the continued listing standards are being met. The Exchange will
also periodically review the website of series of Exchange Traded Fund
Shares to ensure that the requirements of Rule 6c-11 are being met.
Nasdaq also will employ intraday alerts that will notify Exchange
personnel of unusual trading activity throughout the day that could be
indicative of unusual conditions or circumstances that could be
detrimental to the maintenance of a fair and orderly market. The
Exchange also notes that Nasdaq Rule 5701(d) would require an issuer of
Exchange Traded Fund Shares to notify Nasdaq with prompt notification
after the issuer becomes aware of any non-compliance with the
requirements of the Nasdaq Rule 5700 Series, which would encompass any
failure of the issuer to comply with Rule 6c-11 or the 1940 Act.\25\
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\25\ The Exchange notes that failure by an issuer to notify the
Exchange of non-compliance pursuant to Nasdaq Rule 5701(d) would
itself be considered non-compliance with the requirements of the
Nasdaq Rule 5700 Series and subject to potential trading halts and
the delisting process in the Nasdaq Rule 5800 Series.
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Additionally, Nasdaq represents that its surveillance procedures
are adequate to properly monitor the trading of the Exchange Traded
Fund Shares in all trading sessions and to deter and detect violations
of Exchange rules and applicable federal securities laws.\26\
Specifically, the Exchange intends to utilize its existing surveillance
procedures applicable to Nasdaq-listed securities, which are currently
applicable to Index Fund Shares and Exchange Traded Fund Shares, among
other product types, to monitor trading in Exchange Traded Fund Shares.
The Exchange or the Financial Industry Regulatory Authority, Inc.
(``FINRA''), on behalf of the Exchange, will communicate as needed
regarding trading in Exchange Traded Fund Shares and certain of their
applicable underlying components with other markets that are members of
the Intermarket Surveillance Group (``ISG'') or with which Nasdaq has
in place a comprehensive surveillance sharing agreement (``CSSA'').
---------------------------------------------------------------------------
\26\ Nasdaq will obtain a representation from the ETF that the
net asset value per share for each series of Exchange Traded Fund
Shares will be calculated daily and will be made available to all
market participants at the same time. Nasdaq will also obtain a
representation from the issuers of each series of Exchange Traded
Fund Shares that the requirements of proposed Nasdaq Rule 5704 will
be satisfied.
---------------------------------------------------------------------------
Additionally, FINRA, on behalf of the Exchange, is able to access,
as needed, trade information for certain fixed income securities that
may be held by a series of Exchange Traded Fund Shares reported to
FINRA's Trade Reporting and Compliance Engine (``TRACE''). FINRA also
can access data obtained from the Municipal Securities Rulemaking
Board's (``MSRB'') Electronic Municipal Market Access (``EMMA'') system
relating to municipal bond trading activity for surveillance purposes
in connection with trading in a series of Exchange Traded Fund Shares,
to the extent that a series of Exchange Traded Fund Shares holds
municipal securities. Finally, as noted above, the issuer of a series
of Exchange Traded Fund Shares will be required to comply with Rule
10A-3 under the Act for the initial and continued listing of Exchange-
Traded Fund Shares, as provided under Nasdaq Rule 5615(a)(6)(A) and the
changes to Nasdaq Rule 5615(a)(6)(B) as proposed herein.
The Exchange notes that Exchange Traded Fund Shares will be subject
to all Exchange rules applicable to equities trading, including rules
governing Exchange member disclosure obligations in connection with
equities trading, and that Rule 6c-11 does not change the applicability
of these Exchange rules with respect to these securities.\27\
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\27\ With respect to trading in Exchange Traded Fund Shares, all
of the Nasdaq member obligations relating to product description and
prospectus delivery requirements will continue to apply in
accordance with the Exchange rules and federal securities laws, and
Nasdaq will continue to monitor its members for compliance with such
requirements, which are not changing as a result of Rule 6c-11 under
the 1940 Act.
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Proposed Nasdaq Rule 5704(d) states that upon termination of an
ETF, Nasdaq requires that each series of Exchange Traded Fund Shares
issued in connection with such entity be removed from listing.
Proposed Nasdaq Rule 5704(e) states that neither Nasdaq, the
Reporting Authority, nor any agent of Nasdaq will have any liability
for damages, claims, losses or expenses caused by any errors,
omissions, or delays in calculating or disseminating any current index
or portfolio value, the current value of the portfolio of securities
required to be deposited to the open-end management investment company
in connection with issuance of a series of Exchange Traded Fund Shares;
the amount of any dividend equivalent payment or cash distribution to
holders of a series of Exchange Traded Fund Shares; net asset value; or
other information relating to the purchase, redemption or trading of a
series of Exchange Traded Fund Shares, resulting from any negligent act
or omission by Nasdaq, the Reporting Authority or any agent of Nasdaq,
or any act, condition or cause beyond the reasonable control of Nasdaq,
its agent, or the Reporting Authority, including, but not limited to,
an act of God; fire; flood; extraordinary weather conditions; war;
insurrection; riot; strike; accident; action of government;
communications or power failure; equipment or software malfunction; or
any error, omission or delay in the reports of transactions in one or
more underlying securities.\28\
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\28\ The proposed requirements are substantively identical to
those included in Nasdaq Rule 5705(b)(11) (Index Fund Shares) and in
Nasdaq Rule 5735(e) (Managed Fund Shares).
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Proposed Nasdaq Rule 5704(f) states that a security that has
previously been approved for listing on the Exchange pursuant to the
generic listing requirements specified in Nasdaq Rule 5705(b) or Nasdaq
Rule 5735(b)(1), or pursuant to an approval of a proposed rule change
or subject to a notice of effectiveness by the Commission, may be
considered for listing solely under this Rule 5704 if such security is
eligible to operate in reliance on Rule 6c-11
[[Page 19988]]
under the 1940 Act. At the time of listing of such security under this
Rule 5704, the continued listing requirements applicable to such
previously-listed securities will be those specified in paragraph (b)
of this Rule 5704. Any requirements for listing as specified in Nasdaq
Rule 5705(b) or Nasdaq 5735(b)(1), or an approval order or notice of
effectiveness of a separate proposed rule change, that differ from the
requirements of this Rule 5704 will no longer be applicable to such
security.\29\
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\29\ To the extent that a series of Exchange Traded Fund Shares
does not satisfy one or more of the criteria in proposed Nasdaq Rule
5704, the Exchange may file a separate proposal under Section 19(b)
of the Act in order to list such series on the Exchange. Further, in
the event that a series of Exchange Traded Fund Shares becomes
listed under proposed Nasdaq Rule 5704 and subsequently can no
longer rely on Rule 6c-11, so long as the series of Exchange Traded
Fund Shares may otherwise rely on exemptive relief issued by the
Commission, such series of Exchange Traded Fund Shares may be listed
as a series of Index Fund Shares under Nasdaq Rule 5705 or Managed
Fund Shares under Nasdaq Rule 5735, as applicable, as long as the
series of Exchange Traded Fund Shares meets all listing requirements
under the applicable rule.
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Amendments to Nasdaq Rule 4120. Limit Up-Limit Down Plan and Trading
Halts
The Exchange proposes to amend Nasdaq Rule 4120 to include Exchange
Traded Fund Shares in Nasdaq Rule 4120(a)(9) and Nasdaq Rule
4120(a)(10) \30\ as these rules apply to trading halts. This will
ensure the applicability of trading halts to the trading of Exchange
Traded Fund Shares listed on Nasdaq and traded on Nasdaq pursuant to
unlisted trading privileges.
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\30\ The definition of ``Derivative Securities'' found in Nasdaq
Rule 4102(b)(4)(A) is referenced in Nasdaq Rule 4120(a)(10) as the
applicable definition for that rule.
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Amendments to Nasdaq Rule 5615. Exemptions From Certain Corporate
Governance Requirements
The Exchange also proposes to amend the definition of ``Derivative
Securities'' in Nasdaq Rule 5615 to incorporate Exchange Traded Fund
Shares so Rule 5615 and its exemptions from certain corporate
governance requirements are applicable to Exchange Traded Fund Shares.
The proposed addition of Exchange Traded Fund Shares to Nasdaq Rules
4120 and 5615 would subject Exchange Traded Fund Shares to the same
requirements currently applicable to other 1940 Act-registered
investment company securities (i.e., Index Fund Shares, Managed Fund
Shares and Portfolio Depositary Receipts).
Amendments to Nasdaq Rule 5705(b). Index Fund Shares
The Exchange also proposes to amend the definition of ``Derivative
Securities Products'' in Nasdaq Rule 5705(b)(3)(A)(i)a. to incorporate
Exchange Traded Fund Shares so the exclusions applicable to Derivative
Securities Products in Nasdaq Rule 5705(b)(3)(A) will also apply to
Exchange Traded Fund Shares, as well as minor changes to improve
clarity. Nasdaq believes that this is appropriate because ETFs that are
currently listed pursuant to Nasdaq Rule 5705(b) and are permitted to
operate in reliance on Rule 6c-11 and list pursuant to proposed Nasdaq
Rule 5704 should be included in the existing exclusions.
Amendments to Nasdaq Rule 5735. Managed Fund Shares
The Exchange also proposes to amend the definition of ``Exchange
Traded Derivative Securities'' in Nasdaq Rule 5735(c)(6) to incorporate
Exchange Traded Fund Shares so the exclusions applicable to Exchange
Traded Derivative Securities in Nasdaq Rule 5735(b)(1)(A) will also
apply to Exchange Traded Fund Shares, as well as a minor change to
improve clarity. Nasdaq believes this is appropriate because ETFs that
are currently listed pursuant to Nasdaq Rule 5735(b) and are permitted
to operate in reliance on Rule 6c-11 and list pursuant to proposed
Nasdaq Rule 5704 should be included in the existing exclusions.
Proposed Discontinuance of Quarterly Reporting Obligation for Managed
Fund Shares
On September 23, 2016, the SEC approved Nasdaq Rule 5735(b)(1),
adopting generic listing standards for Managed Fund Shares.\31\ In
proposing that rule, Nasdaq represented that it would provide the
Commission staff with a report each calendar quarter about issues of
Managed Fund Shares listed under that rule.\32\
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\31\ See Exchange Act Release No. 78918 (September 23, 2016), 81
FR 67033 (September 29, 2016) (SR-NASDAQ-2016-104).
\32\ See Exchange Act Release No. 78616 (August 18, 2016), 81 FR
57968 at 57973 (August 24, 2016) (``the Exchange will provide the
Commission staff with a report each calendar quarter that includes
the following information for issues of Managed Fund Shares listed
during such calendar quarter under Rule 5735(b)(1): (1) Trading
symbol and date of listing on the Exchange; (2) the number of active
authorized participants and a description of any failure of an issue
of Managed Fund Shares or of an authorized participant to deliver
shares, cash, or cash and financial instruments in connection with
creation or redemption orders; and (3) a description of any failure
of an issue of Managed Fund Shares to comply with Nasdaq Rule
5735'').
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The quarterly reports were initially intended to provide SEC Staff
insight into the number and type of funds listed pursuant to Nasdaq
Rule 5735(b)(1), as well as highlight any issues regarding the trading
of such funds or a funds' compliance with the continued listing
standards. Nasdaq believes that since the implementation of this
requirement, SEC Staff has received an ample number of reports as to
gain sufficient understanding of the products listed pursuant to Nasdaq
Rule 5735(b)(1). SEC Staff has now had several years of experience
monitoring through these reports and has not detected any significant
issues involving Managed Fund Shares listed under Nasdaq Rule
5735(b)(1).
Nasdaq also believes such quarterly reports will no longer be
necessary because Rule 6c-11 collapses the distinction between Index
Fund Shares and Managed Fund Shares, which illustrates that the SEC has
reached a sufficient level of comfort with Managed Fund Shares. As a
result, the Exchange believes that the quarterly reports no longer
serve an ongoing purpose and, therefore, proposes to discontinue such
reporting going forward. Rule 6c-11(d) includes specific ongoing
reporting requirements for ETFs, such as written agreements between an
authorized participant and a fund allowing purchase or redemption of
creation units, information regarding the baskets exchanged with
authorized participants, and the identity of authorized participants
transacting with a fund.\33\ This information will be sufficient for
the SEC's examination staff to determine compliance with Rule 6c-11 and
the applicable federal securities laws.\34\
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\33\ Rule 6c-11(d), which sets forth recordkeeping requirements
applicable to exchange-traded funds, provides that that the
exchange-traded fund must maintain and preserve for a period of not
less than five years, the first two years in an easily accessible
place: (1) All written agreements (or copies thereof) between an
authorized participant and the exchange-traded fund or one of its
service providers that allows the authorized participant to place
orders for the purchase or redemption of creation units; (2) For
each basket exchanged with an authorized participant, records
setting forth: (i) The ticker symbol, CUSIP or other identifier,
description of holding, quantity of each holding, and percentage
weight of each holding composing the basket exchanged for creation
units; (ii) If applicable, identification of the basket as a custom
basket and a record stating that the custom basket complies with
policies and procedures that the exchange-traded fund adopted
pursuant to paragraph (c)(3) of Rule 6c-11; (iii) Cash balancing
amount (if any); and (iv) Identity of authorized participant
transacting with the exchange traded fund.
\34\ In the Adopting Release, the SEC stated, ``requiring ETFs
to maintain records regarding each basket exchanged with authorized
participants will provide our examination staff with a basis to
understand how baskets are being used by ETFs, particularly with
respect to custom baskets. In order to provide our examination staff
with detailed information regarding basket composition, however, we
have modified rule 6c-11 to require the ticker symbol, CUSIP or
other identifier, description of holding, quantity of each holding,
and percentage weight of each holding composing the basket exchanged
for creation units as part of the basket records, instead of the
name and quantities of each position as proposed. We believe that
this additional information will better enable our examination staff
to evaluate compliance with the rule and other applicable provisions
of the federal securities laws.'' See Adopting Release at 57195.
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[[Page 19989]]
Nasdaq also believes that for the reasons stated above, as well as
that the quarterly reports as currently required are duplicative of the
new Rule 6c-11(d) requirements, there is no longer a reason to keep
this reporting requirement. To avoid unnecessary overlap and potential
inconsistency, as well as to avoid unnecessary, duplicative burdens on
authorized participants and their firms in providing and maintaining
information regarding creation and redemption activity, the Exchange
proposes to discontinue the filing of quarterly reports with respect to
Managed Fund Shares under Nasdaq Rule 5735(b).
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\35\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\36\ in particular, because it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to, and
perfect the mechanisms of, a free and open market and a national market
system and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78f(b).
\36\ 15 U.S.C. 78f(b)(5).
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The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest because it would facilitate the listing and trading of
additional Exchange Traded Fund Shares, which would enhance competition
among market participants, to the benefit of investors and the
marketplace. The generic listing rules in proposed Nasdaq Rule 5704, as
described above, will facilitate efficient procedures for listing ETFs
that are permitted to operate in reliance on Rule 6c-11 and are
consistent with and will further the SEC's goals in adopting Rule 6c-
11. Nasdaq will notify the Commission through the filing of a Form 19b-
4(e) when an ETF lists on Nasdaq pursuant to proposed Nasdaq Rule 5704.
The Form 19b-4(e) will identify the Nasdaq rule under which the ETF is
being generically listed. The Exchange will retain its right to file a
Form 19b-4 under Nasdaq Rule 5705(b) and Nasdaq Rule 5735,
respectively, for the listing and trading of Index Fund Shares or
Managed Fund Shares. Nasdaq will also file a Form 19b-4(e) for ETFs
that decide to switch from operating under Nasdaq rules other than
proposed Nasdaq Rule 5704 to operating in compliance with Rule 6c-11
and in conformity with proposed Nasdaq Rule 5704.
Additionally, by allowing Exchange Traded Fund Shares to be listed
and traded on the Exchange without a prior SEC approval order or notice
of effectiveness pursuant to Section 19(b) of the Act, proposed Nasdaq
Rule 5704 will significantly reduce the time frame and costs associated
with bringing Exchange Traded Fund Shares to market, thereby promoting
market competition among issuers of these securities, to the benefit of
the investors. Also, the proposed change would fulfill the intended
objective of Rule 19b-4(e) under the Act by permitting Exchange Traded
Fund Shares that satisfy the proposed listing standards to be listed
and traded without separate SEC approval.
With respect to both proposed Nasdaq Rule 5704(a)(1)(A), which
defines the term ``Exchange Traded Fund'', and proposed Nasdaq Rule
5704(a)(1)(B), which defines the term ``Exchange Traded Fund Share'',
the Exchange believes these definitions will increase the clarity to
the benefit of investors and the marketplace. Additionally, these terms
mirror the definitions as set forth in Rule 6c-11.\37\
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\37\ See Adopting Release at 57178 and at 57234, respectively.
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With respect to proposed Nasdaq Rule 5704(a)(1)(C), which defines
the term ``Reporting Authority'', the Exchange believes that defining
the term generally consistent with how it is defined in Nasdaq Rule
5705 \38\ and Nasdaq Rule 5735 \39\ will increase the clarity to the
benefit of investors and the marketplace.
---------------------------------------------------------------------------
\38\ See Nasdaq Rule 5705(b)(1)(C).
\39\ See Nasdaq Rule 5735(c)(4).
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With respect to proposed Nasdaq Rule 5704(b), Exchange Traded Fund
Shares will be listed and traded on the Exchange subject to the
requirement that each series of Exchange Traded Fund Shares is eligible
to operate in reliance on Rule 6c-11 \40\ and must satisfy the
requirements of this proposed Nasdaq Rule 5704 on an initial and
continued listing basis. This requirement will ensure that Exchange-
listed Exchange Traded Fund Shares continue to operate in a manner that
fully complies with the portfolio transparency requirements of Rule 6c-
11(c). This will also ensure that Exchange Traded Fund Shares listed
and traded on the Exchange in accordance with Nasdaq Rule 5704 on an
initial and continued listing basis will serve to perfect the
mechanisms of, a free and open market and a national market system and,
in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\40\ Rule 6c-11(c) sets forth certain conditions applicable to
ETFs, including information required to be disclosed on the ETF's
website.
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With respect to proposed Nasdaq Rule 5704(b)(1) and subparagraphs
(A)-(D) thereunder (with the exception that subparagraph (A) only
applies on an initial listing basis),\41\ the Exchange believes it is
to the benefit of investors and the marketplace that Nasdaq may approve
an ETF for listing and trading pursuant to Rule 19b-4(e) under the Act.
The approval is also contingent on that each series of Exchange Traded
Fund Shares is eligible to operate in reliance on Rule 6c-11 and
satisfies the requirements of Rule 5704 on an initial and continued
listing basis.
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\41\ Proposed Nasdaq Rule 5704(b)(1)(A)-(D) covers: (i)
Establishing a minimum number of Exchange Traded Fund Shares
required to be outstanding at the time of commencement of trading on
Nasdaq (only applicable on an initial listing basis); (ii) index and
portfolio calculation and dissemination, as well as ``fire walls''
and procedures designed to prevent the use and dissemination of
material non-public information regarding the actual components of
the index or portfolio; (iii) regular market session trading; and
(iv) the minimum price variation for quoting and entry of orders in
Exchange Traded Fund Shares is $0.01.
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Nasdaq will monitor for compliance with the continued listing
requirements as discussed above. If the ETF is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under proposed Nasdaq Rule 5704(b)(2).\42\ The
Exchange believes that this will help to prevent fraudulent and
manipulative acts and practices.
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\42\ See supra note 25.
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The Exchange believes this also fulfills the intended objective of
Rule 19b-4(e) under the Act by allowing Exchange Traded Fund Shares to
be listed and traded without requiring separate Commission approval.
This will provide investors with additional investment choices in which
they may choose to invest.
With respect to proposed Nasdaq Rule 5704(c), the Exchange will
implement and maintain written surveillance procedures for Exchange
Traded Fund Shares and represents that its surveillance procedures are
adequate to properly monitor such trading in all trading sessions and
to deter and detect violations of Nasdaq rules. Specifically,
[[Page 19990]]
the Exchange intends to utilize its existing surveillance procedures
applicable to securities, which will include Exchange Traded Fund
Shares, to monitor trading in the Exchange Traded Fund Shares
(additional surveillance processes and procedures are described
herein). These surveillance procedures promote just and equitable
principles of trade, to remove impediments to, and perfect the
mechanisms of, a free and open market and a national market system and,
in general, to protect investors and the public interest. The Exchange
believes that the proposal is designed to prevent fraudulent and
manipulative acts and practices because the Exchange will perform
ongoing surveillance of Exchange Traded Fund Shares listed on the
Exchange in order to ensure compliance with Rule 6c-11 on an ongoing
basis.
The Exchange also believes that such concerns are further mitigated
by enhancements to the arbitrage mechanism that will come from Rule 6c-
11, specifically the additional flexibility provided to issuers of
Exchange Traded Fund Shares through the use of custom baskets for
creations and redemptions and the additional information made available
to the public through the additional disclosure obligations.\43\ The
Exchange believes that the combination of these factors will act to
keep Exchange Traded Fund Shares trading near the value of their
underlying holdings and further mitigate concerns around manipulation
of Exchange Traded Fund Shares on Nasdaq.
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\43\ The Exchange notes that the Commission came to a similar
conclusion in several places in the Rule 6c-11 Release. See Adopting
Release at 15-18; 60-61; 69-70; 78-79; 82-84; and 95-96.
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The Exchange will monitor for compliance with Rule 6c-11 to ensure
that the continued listing standards are being met. The Exchange will
also periodically review the website of series of Exchange Traded Fund
Shares to ensure that the requirements of Rule 6c-11 are being met.
Nasdaq also will employ intraday alerts that will notify Exchange
personnel of unusual trading activity throughout the day that could be
indicative of unusual conditions or circumstances that could be
detrimental to the maintenance of a fair and orderly market. The
Exchange also notes that Nasdaq Rule 5701(d) would require an issuer of
Exchange Traded Fund Shares to notify Nasdaq with prompt notification
after the issuer becomes aware of any non-compliance with the
requirements of the Nasdaq Rule 5700 Series, which would encompass any
failure of the issuer to comply with Rule 6c-11.
Nasdaq also believes that its surveillance procedures are adequate
to properly monitor the trading of the Exchange Traded Fund Shares in
all trading sessions and to deter and detect violations of Exchange
rules and applicable federal securities laws. Specifically, the
Exchange intends to utilize its existing surveillance procedures
applicable to Nasdaq-listed securities, which are currently applicable
to Index Fund Shares and Managed Fund Shares, among other product
types, to monitor trading in Exchange Traded Fund Shares. The Exchange
or FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in Exchange Traded Fund Shares and certain of their
applicable underlying components with other markets that are members of
the ISG or with which Nasdaq has in place a CSSA.
Additionally, FINRA, on behalf of the Exchange, is able to access,
as needed, trade information for certain fixed income securities that
may be held by a series of Exchange Traded Fund Shares reported to
FINRA's TRACE. FINRA also can access data obtained from the MSRB EMMA
system relating to municipal bond trading activity for surveillance
purposes in connection with trading in a series of Exchange Traded Fund
Shares, to the extent that a series of Exchange Traded Fund Shares
holds municipal securities. Finally, as noted above, the issuer of a
series of Exchange Traded Fund Shares will be required to comply with
Rule 10A-3 under the Act for the initial and continued listing of
Exchange-Traded Fund Shares, as provided under Nasdaq Rule
5615(a)(6)(A) and the changes to Nasdaq Rule 5615(a)(6)(B) as proposed
herein.
With respect to proposed Nasdaq Rule 5704(d), which states that
upon termination of an ETF that Nasdaq will remove from listing the
Exchange Traded Fund Shares issued in connection with such entity. The
Exchange believes that adopting language similar to language already
included in Nasdaq Rule 5705(b)(9)(B)(i) and in Nasdaq Rule
5735(d)(2)(E) makes for consistency among Nasdaq's rules and benefits
investors and the marketplace by making clear rules that lessen
potential confusion.
With respect to proposed Nasdaq Rule 5704(e), which sets forth the
limitation of liability applicable to Nasdaq, the Reporting Authority,
or any agent of Nasdaq, the Exchange believes that requiring similar
written disclosure to that already required under Nasdaq Rule
5705(b)(11) and Nasdaq Rule 5735(e) makes for consistency among
Nasdaq's rules and benefits investors and the marketplace by reducing
potential confusion.
With respect to proposed Nasdaq Rule 5704(f), which states that a
security that has previously been approved for listing on the Exchange
pursuant to the generic listing requirements specified in Nasdaq Rule
5705(b) or Nasdaq Rule 5735(b)(1), or pursuant to an approval of a
proposed rule change filed or subject to a notice of effectiveness by
the Commission, may be considered for listing solely under this
proposed Nasdaq Rule 5704 if the security is permitted to operate in
reliance on Rule 6c-11 under the 1940 Act and at the time of listing of
such security under this proposed Nasdaq Rule 5704, the continued
listing requirements applicable to such security will be those
specified in paragraph (b) of this proposed Nasdaq Rule 5704, the
Exchange believes [sic] makes for consistency among Nasdaq's rules and
benefits investors and the marketplace by making clear rules that
lessen potential confusion.
The Exchange believes the rest of proposed Nasdaq Rule 5704(f),
which states any requirements for listing as specified in Rule 5705(b)
or 5735(b)(1), or an approval order or notice of effectiveness of a
separate proposed rule change that differ from the requirements of this
Rule 5704 will no longer be applicable to such securities will
streamline the listing process for such security, consistent with the
regulatory framework adopted in Rule 6c-11 under the 1940 Act.
The Exchange believes that proposed Nasdaq Rule 5704, as well as
amendments to Nasdaq Rules 4120, 5615, 5705(b), and 5735 will
facilitate the listing and trading of additional types of exchange-
traded products that will enhance competition among market
participants, to the benefit of investors and the marketplace.
Proposed Nasdaq Rule 5704 and related amendments to other Nasdaq
rules are also designed to protect investors and the public interest
because the Exchange deems Exchange Traded Fund Shares to be equity
securities and therefore they would be subject to the full panoply of
Exchange rules and procedures that currently govern the trading of
equity securities on the Exchange.\44\
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\44\ See note 4 above, Adopting Release at 57171.
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Nasdaq believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices. The Exchange
has in place
[[Page 19991]]
written surveillance procedures that are adequate to properly monitor
trading in the Exchange Traded Fund Shares in all trading sessions and
to deter and detect violations of Exchange rules and applicable federal
securities laws. The surveillance procedures for monitoring compliance
with Rule 6c-11 will be consistent with the manner in which the
Exchange conducts its trading surveillance for ETFs. The Exchange will
also require that issuers of Exchange Traded Fund Shares listed under
proposed Nasdaq Rule 5704 must notify the Exchange regarding instances
of non-compliance. Additionally, the Exchange will require periodic
certifications from the issuer that it has maintained compliance with
Rule 6c-11. Nasdaq will also check the ETF's website on a periodic
basis for the inclusion of proper disclosure in compliance with Rule
6c-11. As stated previously, Nasdaq will continue to monitor for
compliance with the continued listing standards.
The Exchange believes that the proposed rule change seeks to
incorporate Rule 6c-11 into Nasdaq's rules will promote just and
equitable principles of trade, to remove impediments to, and perfect
the mechanisms of, a free and open market and a national market system
and, in general, to protect investors and the public interest. As the
SEC noted in its Adopting Release, Rule 6c-11 may allow ETFs to operate
in the public interest and consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
Act,\45\ as well as lead to increased capital formation particularly in
the form of an increased demand for ETFs.\46\
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\45\ Id. at 57166.
\46\ Id. at 57220.
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The Exchange believes that the amendments to Nasdaq Rules 5705(b)
and 5735 to include Exchange Traded Fund Shares into the existing
exclusions of these rules promotes just and equitable principles of
trade, removes impediments to, and perfects the mechanisms of, a free
and open market and a national market system by ensuring that Exchange
Traded Fund Shares are treated consistently with Index Fund Shares and
Managed Funds Shares. The Exchange believes that the minor changes to
these rules improve clarity and serve to better protect investors and
the public interest.
The Exchange believes that the discontinuance of quarterly reports
currently required for Managed Fund Shares under Nasdaq Rule 5735(b)
will no longer be necessary in light of the requirements of Rule 6c-
11(d) \47\ and the breadth of information that has been submitted to
date under this requirement promotes just and equitable principles of
trade, removes impediments to, and perfects the mechanisms of, a free
and open market and a national market system by eliminating a
requirement no longer necessary or of benefit to the Commission.
---------------------------------------------------------------------------
\47\ See supra note 33.
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As discussed above, Rule 6c-11(d) includes specific ongoing
reporting requirements for exchange-traded funds, including written
agreements between an authorized participant and a fund allowing
purchase or redemption of creation units, information regarding the
baskets exchanged with authorized participants, and the identity of
authorized participants transacting with a fund. The SEC has stated
that the information required by Rule 6c-11(d) will provide the SEC's
examination staff with information to determine compliance with Rule
6c-11 and applicable federal securities laws.
In addition, and as discussed above, Rule 6c-11 collapses the
distinction between Index Fund Shares and Managed Fund Shares. Nasdaq
believes that the SEC has reached a level of comfort with Managed Fund
Shares that makes the ongoing receipt of the information included in
the quarterly reports unnecessary.
In addition and as also discussed above, Nasdaq believes that since
the implementation of this requirement, SEC Staff has received an ample
number of reports as to gain sufficient understanding Managed Fund
Shares and has not detected any significant issues involving Managed
Fund Shares listed under Nasdaq Rule 5735(b)(1). The quarterly reports
were initially intended to provide SEC Staff insight into the number
and type of funds listed pursuant to Nasdaq Rule 5735(b)(1), as well as
highlight any issues regarding the trading of such funds or a funds'
compliance with the continued listing standards.
As a result, Nasdaq believes it should discontinue the filing of
quarterly reports with respect to Managed Fund Shares under Nasdaq Rule
5735(b). This will avoid unnecessary overlap and potential
inconsistency between the quarterly reports and the reporting
requirements of Rule 6c-11(d). It will also avoid unnecessary,
duplicative burdens on authorized participants and their firms in
providing and maintaining information regarding creation and redemption
activity.
For the above reasons, the Exchange believes that the proposal is
consistent with the requirements of Section 6(b)(5) of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Rather, the
Exchange believes that the proposed rule change would facilitate the
listing and trading of Exchange Traded Fund Shares and result in a
significantly more efficient process surrounding the listing and
trading of ETFs, which will enhance competition among market
participants, to the benefit of investors and the marketplace.
The Exchange believes that this would reduce the time frame for
bringing ETFs to market, thereby reducing the burdens on issuers and
other market participants and promoting competition. In turn, the
Exchange believes that the proposed change would make the process for
listing Exchange Traded Fund Shares more competitive by applying
uniform listing standards with respect to Exchange Traded Fund Shares.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 4, is consistent with the Act and
rules and regulations thereunder applicable to a national securities
exchange.\48\ In particular, the Commission finds that the proposed
rule change, as modified by Amendment No. 4, is consistent with Section
6(b)(5) of the Act,\49\ which requires, among other things, that the
Exchange's rules 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.
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\48\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\49\ 15 U.S.C. 78f(b)(5).
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[[Page 19992]]
A. Proposed Nasdaq Rule 5704
As an initial matter, the Commission notes that the Exchange
currently has generic listing standards for Index Fund Shares, Managed
Fund Shares, and Portfolio Depositary Receipts,\50\ and therefore
proposed Rule 5704 would not permit the Exchange to generically list
any novel product types. The Commission also notes that a number of the
provisions of proposed Rule 5704 are substantively identical to
provisions of other Nasdaq listing rules.\51\
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\50\ See Nasdaq Rules.
\51\ See supra notes 15, 19, 20, and 28 and accompanying text,
respectively.
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The Commission believes that proposed Nasdaq Rule 5704 is
reasonably designed to help prevent fraudulent and manipulative acts
and practices. A central qualification for listing under the proposed
rule is ongoing compliance with Rule 6c-11 under the 1940 Act, which
requires, among other things, ETFs to prominently disclose the
portfolio holdings that will form the basis for each calculation of net
asset value per share.\52\ Because initial and ongoing compliance with
Rule 6c-11 of the 1940 Act is a condition for listing and trading on
the Exchange, the proposed rule would permit Nasdaq to list and trade
shares of an investment company with a fully transparent portfolio,\53\
and the Commission believes that portfolio transparency should help
prevent manipulation of the price of Exchange Traded Fund Shares.\54\
Additionally, proposed Nasdaq Rule 5704 includes requirements relating
to fire walls and procedures to prevent the use and dissemination of
material, non-public information regarding the applicable ETF index and
portfolio,\55\ all such requirements of which are designed to prevent
fraudulent and manipulative acts and practices.\56\ The Commission
specifically notes that certain of these requirements relating to such
fire walls and procedures, which are substantively identical to
Nasdaq's rules governing the listing and trading of index-based and
actively managed ETFs, apply in addition to what is already required
under the Act and the 1940 Act and respective rules and regulations
thereunder, and the Commission believes that such requirements
collectively provide additional protections against the potential
misuse of material, non-public information. Therefore, the Commission
concludes that the proposed requirements relating to such fire walls
and procedures, combined with ETF portfolio transparency and the
existing requirements under the Act and 1940 Act, should help to
protect against fraudulent and manipulative acts and practices under
Section 6(b)(5) of the Act.
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\52\ See Adopting Release, supra note 10, at 57180-81.
\53\ See supra note 9. The Commission also noted that, with
respect to ETF portfolio transparency, the disclosures are designed
to promote an effective arbitrage mechanism and inform investors
about the risks of deviation between market price and net asset
value when deciding whether to invest in ETFs generally or in a
particular ETF. See Adopting Release, supra note 10, at 57166.
\54\ See Adopting Release, supra note 10, at 57169 (concluding
that portfolio transparency combined with existing requirements
should be sufficient to protect against certain abuses).
\55\ For example, proposed Nasdaq Rule 5704(b)(1)(B)(i) states
that if the investment adviser to an ETF is affiliated with a
broker-dealer, such investment adviser will erect and maintain a
``fire wall'' between the investment adviser and the broker-dealer
with respect to access to information concerning the composition
and/or changes to the underlying portfolio. In addition, personnel
who make decisions on the ETF's portfolio composition must be
subject to procedures designed to prevent the use and dissemination
of material nonpublic information regarding the applicable ETF
portfolio. Proposed Nasdaq Rule 5704(b)(1)(B)(ii) states that the
Reporting Authority that provides the ETF's portfolio must implement
and maintain, or be subject to, procedures designed to prevent the
use and dissemination of material non-public information regarding
the actual components of the portfolio. Proposed Nasdaq Rule
5704(b)(1)(B)(iii) states that if the index underlying a series of
Exchange Traded Fund Shares is maintained by a broker-dealer or fund
adviser, the broker-dealer or fund adviser shall erect and maintain
a ``fire wall'' around the personnel who have access to information
concerning changes and adjustments to the index and the index will
be calculated by a third party who is not a broker-dealer or fund
adviser. Additionally, proposed Nasdaq Rule 5704(b)(1)(B)(iv) states
that any advisory committee, supervisory board, or similar entity
that advises a Reporting Authority or that makes decisions on the
index composition, methodology and related matters, must implement
and maintain, or be subject to, procedures designed to prevent the
use and dissemination of material non-public information regarding
the applicable index. See generally proposed Nasdaq Rule
5704(b)(1)(B).
\56\ In adopting Rule 6c-11, the Commission determined that the
safeguards in the existing regulatory regime adequately address
``special concerns that self-indexed ETFs present, including the
potential ability of an affiliated index provider to manipulate an
underlying index to the benefit or detriment of a self-indexed
ETF.'' Adopting Release, supra note 10, 84 FR at 57168.
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Proposed Nasdaq Rule 5704(c) requires that the Exchange implement
and maintain written surveillance procedures for Exchange Traded Fund
Shares. The Exchange will employ its existing surveillance procedures
to trading in Exchange Traded Fund Shares, and represents that its
surveillance procedures are adequate to (a) properly monitor the
trading of such securities during all trading sessions and (b) deter
and detect violations of Exchange rules and the applicable federal
securities laws.\57\ Further, the Exchange represents that it, or FINRA
on behalf of the Exchange, will communicate as needed regarding trading
in Exchange Traded Fund Shares and certain of their applicable
underlying components with other markets that are members of the ISG or
with which Nasdaq has a CSSA in place. The Exchange represents that its
surveillance procedures for monitoring compliance with Rule 6c-11 under
the 1940 Act will be consistent with the manner in which the Exchange
conducts its trading surveillance for ETFs. The Exchange will require
issuers of Exchange Traded Fund Shares listed under proposed Nasdaq
Rule 5704 to notify the Exchange of instances of non-compliance.
Additionally, the Exchange will require periodic certifications from
the issuer that it has maintained compliance with Rule 6c-11, and
Nasdaq will also check the ETF's website on a periodic basis for the
inclusion of proper disclosure in compliance with Rule 6c-11. Finally,
proposed Nasdaq Rule 5704(b)(2)(b) requires that the Exchange delist a
series of Exchange Traded Fund Shares if, following the initial 12-
month period after commencement of trading, there are fewer than 50
beneficial holders of such series.
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\57\ The Commission also finds that the proposed rule change, as
modified by Amendment No. 4, is consistent with Section 6(b)(1) of
the Act, which requires (among other things) that a national
securities exchange be organized and have the capacity to comply
with its own rules. The Exchange represents that it will: (1)
Monitor for compliance with Rule 6c-11 to ensure that the continued
listing standards are being met; (2) periodically review the website
of series of Exchange Traded Fund Shares to ensure that the
requirements of Rule 6c-11 are being met; (c) obtain a
representation from each issuers of a series of Exchange Traded Fund
Shares that the requirements of proposed Nasdaq Rule 5704 will be
satisfied.
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Consistent with the requirement of Section 6(b)(5) of the Act \58\
that the Exchange's rules be designed to remove impediments to and
perfect the mechanism of a free and open market, the Exchange's rules
regarding trading halts will help to ensure the maintenance of fair and
orderly markets for Exchange Traded Fund Shares. Specifically, as
discussed above, the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in a series of
Exchange Traded Fund Shares. Nasdaq states that trading in Exchange
Traded Fund Shares will be halted if the circuit breaker parameters in
Nasdaq Rule 4120 have been reached or when the Exchange becomes aware
that the net asset value for a series of Exchange Traded Fund Shares is
not being disseminated to all market participants
[[Page 19993]]
at the same time.\59\ Additionally, trading may be halted because of
market conditions or for reasons that, in the view of the Exchange,
make trading in Exchange Traded Fund Shares inadvisable. As Nasdaq
represents in the proposal, examples of such market conditions or
reasons may be: (1) If the value of the index or portfolio of
securities on which the series of Exchange Traded Fund Shares is based
is no longer calculated or available or an interruption to the
dissemination persists past the trading day in which it occurred; (2)
when certain information about the Exchange Traded Fund Shares that is
required to be disclosed under Rule 6c-11 of the 1940 Act is not being
made available; (3) if trading in the underlying securities comprising
the index or portfolio applicable to such series of Exchange Traded
Fund Shares has been halted; (4) if Nasdaq becomes aware that the net
asset value for a series of Exchange Traded Fund Shares is not being
disseminated to all market participants at the same time; or (5) in the
presence of other unusual conditions or circumstances detrimental to
the maintenance of a fair and orderly market. Further, Nasdaq will
employ intraday alerts, which will notify Exchange personnel of unusual
trading activity throughout the day that could be indicative of unusual
conditions or circumstances that could be detrimental to the
maintenance of a fair and orderly market.\60\
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\58\ 15 U.S.C. 78f(b)(5).
\59\ See supra note 22 and accompanying text.
\60\ See Amendment No. 4, supra note 8, at 26.
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B. Discontinuance of Quarterly Reports of Generically Listed Managed
Fund Shares
In support of its proposal to adopt generic listing standards for
Managed Fund Shares, the Exchange proposed to submit quarterly reports
to the Commission disclosing certain information.\61\ These reports
were designed to identify problems associated with generically listed
Managed Fund Shares. In adopting Rule 6c-11 under the 1940 Act, the
Commission largely eliminated prior distinctions between actively
managed and index-based ETFs, and Nasdaq does not submit quarterly
reports regarding the shares of index-based ETFs that it generically
lists. In addition, the Commission recognizes that, since the adoption
of the Managed Fund Shares generic listing standards, the marketplace
for ETFs has matured and developed, an increased number of actively
managed ETFs have been listed and are trading on national securities
exchanges, and market participants have become more familiar with such
securities. Moreover, proposed Nasdaq Rule 5704(c) requires Nasdaq to
implement and maintain written surveillance procedures for Exchange
Traded Fund Shares.\62\ The Exchange represents that it intends to
utilize its existing surveillance procedures applicable to equity
securities, which will include Exchange Traded Fund Shares, to monitor
trading in the Exchange Traded Fund Shares, and will perform ongoing
surveillance of Exchange Traded Fund Shares listed on the Exchange in
order to ensure compliance with Rule 6c-11 and the 1940 Act on an
ongoing basis. The Commission notes that manipulation concerns are
mitigated by a combination of the Exchange's surveillance procedures,
Nasdaq's ability to halt trading under proposed Nasdaq Rule 5704,
Nasdaq Rules 4120(a)(9) and 4120(a)(10), and the Exchange's ability to
commence delisting proceedings under proposed Nasdaq Rule
5704(b)(2)(B). In light of these reasons, as well as the Commission's
experience with the quarterly reports, the Commission believes that
this proposal is consistent with Section 6(b)(5) of the Act, and it
therefore finds that it is no longer necessary for Nasdaq to continue
to submit such quarterly reports.
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\61\ The information included in these reports is summarized
above. See supra note 32.
\62\ Moreover, Nasdaq Rule 5735(b)(4) requires that the Exchange
implement and maintain written surveillance procedures for Managed
Fund Shares.
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C. Other Related Rule Changes
The Exchange proposes to incorporate Exchange Traded Fund Shares
into the definitions of ``Exchange Traded Derivative Securities'' in
Nasdaq Rule 5735(c)(6) and ``Derivative Securities Products'' in Nasdaq
Rule 5705(b)(3)(A)(i) so that the exclusions applicable to those
defined terms also will apply to Exchange Traded Fund Shares. The
Exchange also proposes to amend Nasdaq Rule 4120 to incorporate
Exchange Traded Fund Shares into Nasdaq Rules 4120(a)(9) and
4120(a)(10) so that these trading halt rules will apply to Exchange
Traded Fund Shares listed on Nasdaq and traded on Nasdaq pursuant to
unlisted trading privileges. Lastly, the Exchange proposes to
incorporate Exchange Traded Fund Shares into the definition of
``Derivative Securities'' in Nasdaq Rule 5615 so that exemptions from
certain corporate governance requirements will be applicable to
Exchange Traded Fund Shares. The Exchange states that these changes
will subject Exchange Traded Fund Shares to the same requirements
currently applicable to other 1940 Act-registered investment company
securities (i.e., Index Fund Shares, Managed Fund Shares, and Portfolio
Depositary Receipts).
The Commission believes that these proposed changes simply
incorporate proposed Rule 5704 into the existing framework of Nasdaq's
rules, and therefore finds that such changes are consistent with
Section 6(b)(5) of the Act.
D. Exchange Representations
In support of this proposal, the Exchange has made the following
representations:
(1) Nasdaq deems Exchange Traded Fund Shares to be equity
securities, thus rendering trading in Exchange Traded Fund Shares
subject to the Exchange's existing rules governing the trading of
equity securities.\63\ The Exchange notes that Exchange Traded Fund
Shares will be subject to rules governing Exchange member disclosure
obligations in connection with equities trading, and that Rule 6c-11
does not change the applicability of these Exchange rules with respect
to these securities.\64\
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\63\ See Amendment No. 4, supra note 8, at 29.
\64\ With respect to trading in Exchange Traded Fund Shares, the
Exchange represents that all of the Nasdaq member obligations
relating to product description and prospectus delivery requirements
will continue to apply in accordance with the Exchange rules and
federal securities laws, and Nasdaq will continue to monitor its
members for compliance with such requirements, which are not
changing as a result of Rule 6c-11 under the 1940 Act.
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(2) Nasdaq will (a) monitor for compliance with Rule 6c-11 to
ensure that the continued listing standards are being met; (b)
periodically review the website of series of Exchange Traded Fund
Shares to ensure that the requirements of Rule 6c-11 are being met; and
(c) employ intraday alerts that will notify Exchange personnel of
unusual trading activity throughout the day that could be indicative of
unusual conditions or circumstances that could be detrimental to the
maintenance of a fair and orderly market.\65\
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\65\ See Amendment No. 4, supra note 8, at 14. The Exchange also
notes that Nasdaq Rule 5701(d) would require an issuer of Exchange
Traded Fund Shares to notify Nasdaq promptly after the issuer
becomes aware of any non-compliance with the requirements of the
Nasdaq Rule 5700 Series, which would encompass any failure of the
issuer to comply with Rule 6c-11 or the 1940 Act. Failure by an
issuer to notify the Exchange of non-compliance pursuant to Nasdaq
Rule 5701(d) would itself be considered non-compliance with the
requirements of the Nasdaq Rule 5700 Series and subject to potential
trading halts and the delisting process in the Nasdaq Rule 5800
Series.
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(3) Nasdaq will obtain a representation from the ETF that the net
asset value per share for each series of
[[Page 19994]]
Exchange Traded Fund Shares will be calculated daily and will be made
available to all market participants at the same time. Nasdaq will also
obtain a representation from the issuers of each series of Exchange
Traded Fund Shares that the requirements of proposed Nasdaq Rule 5704
will be satisfied.\66\
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\66\ See id. at 15, n.20.
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(4) Nasdaq's surveillance procedures are adequate to properly
monitor the trading of the Exchange Traded Fund Shares in all trading
sessions and to deter and detect violations of Exchange rules and
applicable federal securities laws.\67\
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\67\ See id. at 14-15.
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(5) The Exchange, or FINRA on behalf of the Exchange, will
communicate as needed regarding trading in Exchange Traded Fund Shares
and certain of their applicable underlying components with other
markets that are members of the ISG or with which Nasdaq has in place a
CSSA. Additionally, FINRA, on behalf of the Exchange, is able to
access, as needed, trade information for certain fixed income
securities that may be held by a series of Exchange Traded Fund Shares
reported to TRACE. FINRA also can access data obtained from the EMMA
system relating to municipal bond trading activity for surveillance
purposes in connection with trading in a series of Exchange Traded Fund
Shares, to the extent that a series of Exchange Traded Fund Shares
holds municipal securities.\68\
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\68\ See id. at 15.
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(6) Each issuer of a series of Exchange Traded Fund Shares will be
required to comply with Rule 10A-3 under the Act (17 CFR 240.10A-3) for
the initial and continued listing of Exchange-Traded Fund Shares.\69\
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\69\ See id.
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This approval order is based on all of the Exchange's
representations, including those set forth above and in Amendment No.
4. For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 4, is consistent with
Sections 6(b)(1) and 6(b)(5) of the Act \70\ and the rules and
regulations thereunder applicable to a national securities exchange.
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\70\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5), respectively.
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IV. Solicitation of Comments to the Proposed Rule Change, as Modified
by Amendment No. 4
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 4 to 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2019-090 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-NASDAQ-090. 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 10:00 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-NASDAQ-2019-090, and should be submitted
on or before April 30, 2020.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 4
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 4, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
4 in the Federal Register. In Amendment No. 4, the Exchange (among
other things): (1) Modified the circumstances in which it will commence
delisting of, and consider suspending trading in, a series of Exchange
Traded Fund Shares; (2) broadened its undertakings with respect to
ensuring compliance with the proposed generic listing standard; and (3)
clarified that Exchange Traded Fund Shares would be subject to all
Exchange rules applicable to equities trading, including rules
governing Exchange member disclosure obligations. Amendment No. 4 also
provides other clarifications and additional information in support of
the proposed rule change.\71\ These changes, as well as additional
information in Amendment No. 4, assisted the Commission in finding that
the proposal is consistent with the Act. Accordingly, the Commission
finds good cause, pursuant to Section 19(b)(2) of the Act,\72\ to
approve the proposed rule change, as modified by Amendment No. 4, on an
accelerated basis.
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\71\ See Amendment No. 4, supra note 8.
\72\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\73\ that the proposed rule change (SR-NASDAQ-2019-090), as modified by
Amendment No. 4, be, and it hereby is, approved on an accelerated
basis.
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\73\ Id.
\74\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\74\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07440 Filed 4-8-20; 8:45 am]
BILLING CODE 8011-01-P
