Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Disapproving a Proposed Rule Change To Amend Nasdaq Rule 5704, 17871-17874 [2021-06987]

Download as PDF Federal Register / Vol. 86, No. 64 / Tuesday, April 6, 2021 / Notices (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: khammond on DSKJM1Z7X2PROD with NOTICES 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– OCC–2021–004 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–OCC–2021–004. 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 such filing also will be available for inspection and copying at the principal office of OCC and on OCC’s website at https://www.theocc.com/CompanyInformation/Documents-and-Archives/ By-Laws-and-Rules. 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–OCC–2021–004 and should VerDate Sep<11>2014 17:34 Apr 05, 2021 Jkt 253001 be submitted on or before April 27, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–06989 Filed 4–5–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91446; File No. SR– NASDAQ–2020–017] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Disapproving a Proposed Rule Change To Amend Nasdaq Rule 5704 March 31, 2021. I. Introduction On July 23, 2020, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend certain listing requirements relating to maintaining a minimum number of beneficial holders and minimum number of shares outstanding. The proposed rule change was published for comment in the Federal Register on August 7, 2020.3 On September 10, 2020, pursuant to Section 19(b)(2) of the Exchange 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 November 5, 2020, the Commission instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 6 to determine whether to approve or disapprove the proposed rule change.7 On January 26, 2021, the Commission designated a longer period for Commission action on the proposed rule change.8 The Commission has received 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 89464 (August 4, 2020), 85 FR 48012 (‘‘Notice’’). 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 89823, 85 FR 57895 (September 16, 2020). 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 90355, 85 FR 71977 (November 12, 2020) (‘‘OIP’’). 8 See Securities Exchange Act Release No. 90994, 86 FR 7750 (February 1, 2021). 1 15 PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 17871 comment letters on the proposed rule change.9 This order disapproves the proposed rule change because, as discussed below, Nasdaq has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), and, in particular, the requirement that the rules of a national securities exchange be designed ‘‘to prevent fraudulent and manipulative acts and practices’’ and ‘‘to protect investors and the public interest.’’ 10 II. Description of the Proposal As described in detail in the Notice and OIP, the Exchange proposes to amend Nasdaq Rule 5704 to: (1) Remove the requirement that, twelve months after the commencement of trading on the Exchange, a series of Exchange Traded Fund Shares must have 50 or more beneficial holders (‘‘Beneficial Holders Rule’’); and (2) replace its existing minimum number of shares requirement (‘‘Minimum Shares Outstanding Rule’’) with a requirement that each series of Exchange Traded Fund Shares have a sufficient number of shares outstanding at the commencement of trading to facilitate the formation of at least one creation unit.11 The Exchange asserts that the Beneficial Holders Rule is no longer necessary. The Exchange argues that the requirements of Rule 6c–11 under the Investment Company Act of 1940 (‘‘1940 Act’’), coupled with the existing creation and redemption process, mitigate the potential lack of liquidity that, according to the Exchange, the Beneficial Holders Rule was intended to address.12 The Exchange further asserts that requiring a sufficient number of shares to be outstanding at all times to facilitate the formation of at least one creation unit, together with the daily portfolio transparency and other enhanced disclosure requirements of 9 Comments on the proposed rule change can be found on the Commission’s website at: https:// www.sec.gov/comments/sr-nasdaq-2020-017/ srnasdaq2020017.htm. 10 15 U.S.C. 78f(b)(5). 11 Currently, Nasdaq Rule 5704(b)(1)(A) provides that the Exchange will establish a minimum number of Exchange Traded Fund Shares required to be outstanding at the time of commencement of trading on the Exchange. 12 In contrast, Nasdaq believes that the shareholder requirement applicable to common stock is a measure of liquidity designed to help assure that there will be sufficient investor interest and trading to support price discovery once a security is listed. See Notice, supra note 3 at 48012, n.6. E:\FR\FM\06APN1.SGM 06APN1 17872 Federal Register / Vol. 86, No. 64 / Tuesday, April 6, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES Rule 6c-11 under the 1940 Act,13 will facilitate an effective arbitrage mechanism and provide market participants and investors with sufficient transparency into the holdings of the underlying portfolio, and ensure that the trading price in the secondary market remains in line with the pershare value of a fund’s portfolio. Specifically with respect to arbitrage, the Exchange states that the arbitrage mechanism relies on the fact that shares of a fund can be created and redeemed and that shares of a fund are able to flow into or out of the market when the price of the fund is not aligned with the net asset value per share of the portfolio. The resulting buying and selling of the shares of the fund, as well as the underlying portfolio components, generally causes the market price and the net asset value per share to converge. In addition, the Exchange states that the proper functioning of the arbitrage mechanism is reliant on the presence of authorized participants (‘‘APs’’) that are eligible to facilitate creations and redemptions with the fund and support the liquidity of the fund. As a result, the Exchange states that the AP is able to buy and sell Exchange Traded Fund Shares from both the fund and investors. Because Exchange Traded Fund Shares can be created and redeemed ‘‘in-kind’’ and do not have an upper limit of the number of shares that can be outstanding, an AP can fulfill customer orders or take advantage of arbitrage opportunities regardless of the number of shares currently outstanding. Thus, the Exchange believes that, unlike common stock, the liquidity of Exchange Traded Fund Shares is not dependent on the number of shares currently outstanding or the number of shareholders, but on the availability of APs to transact in the Exchange Traded Fund Shares primary market. To support these contentions, the Exchange provides information, during a two-month observation period, regarding how closely two funds—the SPY and QQQ—tracked their respective underlying indexes, as well as data regarding creation and redemption activity in those two funds during the same observation period. The Exchange asserts that a symbiotic relationship exists between the disclosure 13 As an example, the Exchange notes that Rule 6c–11(c)(1)(vi) under the 1940 Act requires additional disclosure if the premium or discount is in excess of 2% for more than seven consecutive days and argues that this disclosure would provide additional transparency to investors in the event that the trading value and the underlying portfolio deviate for an extended period of time, which could indicate an inefficient arbitrage mechanism. VerDate Sep<11>2014 17:34 Apr 05, 2021 Jkt 253001 requirements of Rule 6c–11 under the 1940 Act, the ability of the AP to create and redeem shares of a fund, and the functioning of the arbitrage mechanism that helps to ensure that the trading price in the secondary market is at fair value. According to the Exchange, this renders the need for a Beneficial Holders Rule as duplicative and unnecessary. The Exchange further asserts that, in order for fund redemptions to be executed in support of the arbitrage mechanism, it is appropriate that, in lieu of the Beneficial Holders Rule, the fund have a sufficient number of shares outstanding in order to facilitate the formation of at least one creation unit on an initial and continued listing basis. The Exchange claims that the existence of the creation and redemption process, daily portfolio transparency, as well as a sufficient number of shares outstanding to allow for the formation of at least one creation unit, ensures that market participants are able to redeem shares and thereby support the proper functioning of the arbitrage mechanism. According to the Exchange, of the more than 350 funds currently listed on Nasdaq that would be eligible to be listed under Nasdaq Rule 5704, only two had a single creation unit outstanding. The remaining funds have, on average, shares outstanding equal to approximately 300 creation units. In addition, the Exchange states that its surveillance program for, and its ability to halt trading in, Exchange Traded Fund Shares provide for additional investor protections by further mitigating any abnormal trading that would affect the prices of Exchange Traded Fund Shares. The Commission received two comment letters on the proposal, one comment in support of the proposal and one comment unrelated to the proposal.14 The commenter in favor of the proposal states that the Beneficial Holders Rule ‘‘does not appear to provide any meaningful investorprotection benefits.’’ 15 Specifically, the commenter expresses the view that the liquidity of shares of an exchangetraded fund (‘‘ETF’’) is primarily a function of the liquidity of the ETF’s 14 See Letter from Timothy W. Cameron, Asset Management Group—Head, and Lindsey Weber Keljo, Asset Management Group—Managing Director and Associate General Counsel, SIFMA AMG (December 18, 2020) (‘‘SIFMA Letter’’). The second comment letter received was made in connection with a different Nasdaq rule proposal, therefore, this second comment letter is not addressed here. See Letter from Rungsun Pakyo Gunkoom (August 4, 2020) (referencing the file number to this proposed rule change but commenting on a different Nasdaq proposal). 15 SIFMA Letter, supra note 14, at 3. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 underlying securities, that the marketplace taps into this liquidity through the creation and redemption and arbitrage processes, and that this mitigates potential price manipulation concerns.16 In addition, the commenter believes that the enhanced disclosure requirements of Rule 6c–11 under the 1940 Act,17 including those relating to an ETF’s portfolio holdings and when an ETF’s premium or discount exceeds 2% for more than seven consecutive days, will help facilitate effective arbitrage. The commenter conducted a survey of its members that sought information on level of assets, number of beneficial holders, and various trading measures of newly-listed ETFs over different periods following initial listing, and concluded that the number of shareholders in an ETF does not appear to be a significant consideration in an ETF’s sponsor’s decision to delist and terminate an ETF and that this requirement does not appear to offer investor protection benefits.18 III. Discussion and Commission Findings The Commission must consider whether Nasdaq’s proposal is consistent with Section 6(b)(5) of the Exchange Act, which requires, in relevant part, that the rules of a national securities exchange be designed ‘‘to prevent fraudulent and manipulative acts and practices’’ and ‘‘to protect investors and the public interest.’’ 19 Under the Commission’s Rules of Practice, the ‘‘burden to demonstrate that a proposed 16 See id. id. at 3–4. The commenter also states that the Beneficial Holders Rule puts newer and smaller sponsors at an unnecessary disadvantage to larger sponsors having the enterprise-wide scale and distribution reach to gather assets in the months after launch. See id. 18 See id. 19 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a proposed rule change filed by a national securities exchange if it does not find that the proposed rule change is consistent with the applicable requirements of the Exchange Act. Exchange Act Section 6(b)(5) states that an exchange shall not be registered as a national securities exchange unless the Commission determines that ‘‘[t]he rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, or to regulate by virtue of any authority conferred by this title matters not related to the purposes of this title or the administration of the exchange.’’ 15 U.S.C. 78(f)(b)(5). 17 See E:\FR\FM\06APN1.SGM 06APN1 Federal Register / Vol. 86, No. 64 / Tuesday, April 6, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES rule change is consistent with the Exchange Act and the rules and regulations issued thereunder . . . is on the self-regulatory organization [‘SRO’] that proposed the rule change.’’ 20 The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding,21 and any failure of an SRO to provide this information may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act and the applicable rules and regulations.22 Moreover, ‘‘unquestioning reliance’’ on an SRO’s representations in a proposed rule change is not sufficient to justify Commission approval of a proposed rule change.23 The Commission has consistently recognized the importance of the minimum number of holders and other similar requirements, stating that such listing standards help ensure that exchange listed securities have sufficient public float, investor base, and trading interest to provide the depth and liquidity necessary to promote fair and orderly markets.24 As stated by a commenter, the minimum number of holders requirement also helps to mitigate the risks of manipulation.25 As discussed above, the Exchange is proposing to (1) remove the Beneficial Holders Rule applicable to Exchange Traded Fund Shares listed on Nasdaq, and (2) replace its existing Minimum Shares Outstanding Rule with a 20 Rule 700(b)(3), Commission Rules of Practice, 17 CFR 201.700(b)(3). 21 See id. 22 See id. 23 Susquehanna Int’l Group, LLP v. Securities and Exchange Commission, 866 F.3d 442, 447 (D.C. Cir. 2017). 24 The Commission considers distribution standards, including minimum number of holders and number of shares outstanding requirements, to be important means of promoting fair and orderly markets. See, e.g., Securities Exchange Act Release No. 57785 (May 6, 2008), 73 FR 27597 (May 13, 2008) (SR–NYSE–2008–17) (stating that the distribution standards, which include exchange holder and number of shares outstanding requirements ‘‘. . . should help to ensure that the [Special Purpose Acquisition Company’s] securities have sufficient public float, investor base, and liquidity to promote fair and orderly markets’’); Securities Exchange Act Release No. 86117 (June 14, 2019), 84 FR 28879 (June 20, 2018) (SR–NYSE– 2018–46) (disapproving a proposal to reduce the minimum number of public holders continued listing requirement applicable to Special Purpose Acquisition Companies from 300 to 100). 25 See SIFMA Letter, supra note 14, at 3 (stating that the Beneficial Holders Rule was intended to address ‘‘potential price manipulation,’’ among other things). VerDate Sep<11>2014 17:34 Apr 05, 2021 Jkt 253001 requirement that each series of Exchange Traded Fund Shares have a sufficient number of shares outstanding at the commencement of trading to facilitate the formation of at least one creation unit.26 In support of its proposal, the Exchange asserts that the Beneficial Holders Rule is no longer necessary because the requirements of Rule 6c–11 under the 1940 Act, coupled with the existing creation and redemption process, mitigate the potential lack of liquidity that Nasdaq believes the Beneficial Holders Rule was intended to address. However, the Exchange does not sufficiently support its assertions under the Exchange Act, particularly where a series of Exchange Traded Fund Shares is permitted to have a very small number of beneficial holders. For example, while the Exchange provides data with respect to two widely held and highly liquid funds, SPY and QQQ, and explains the role of APs in the creation and redemption process, it does not sufficiently address how the arbitrage mechanism will ensure Exchange Traded Fund Shares with very few beneficial holders would be sufficiently liquid to support fair and orderly markets. The Exchange also does not discuss in sufficient detail the potential inefficiencies in the arbitrage mechanism that might occur with illiquid Exchange Traded Fund Shares that have very few holders, and the impact that would have on the ability of the arbitrage mechanism to effectively mitigate the risks of manipulation. In addition, the Exchange does not sufficiently explain how an efficient and effective arbitrage mechanism and sufficient liquidity could result for a series of Exchange Traded Fund Shares held only by a very few number of buyand-hold investors and thereby mitigate manipulation risks. Further, the Exchange does not sufficiently address the impact of creation unit size on the efficiency of the arbitrage mechanism. For example, with respect to a series of illiquid Exchange Traded Fund Shares with very few beneficial holders, the Exchange does not describe how the proposal is designed to mitigate the risks of manipulation if the creation unit size for the Exchange Traded Fund Shares is large in comparison to the 26 The Commission identified its concern in the OIP that, while Nasdaq states that it would require that a sufficient number of shares to be outstanding at ‘‘all times’’ to facilitate the formation of at least one creation unit, proposed Nasdaq Rule 5704(b)(1)(A) establishes that requirement ‘‘at the time of commencement of trading on Nasdaq,’’ making it an initial and not a continued listing standard. See OIP, supra note 7, 85 FR at 71978, n.14. As discussed below, the Exchange has not responded to the concerns raised in the OIP. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 17873 total number of Exchange Traded Fund Shares outstanding. The Exchange provides no data or analysis to support its position, other than with respect to the SPY and QQQ, two highly liquid and widely held ETFs, and the number and size of the creation units for existing Exchange Traded Fund Shares. In fact, although the Exchange discusses risks relating to lack of liquidity, the Exchange fails to provide any analysis regarding susceptibility to manipulation under the Exchange Act in the proposed rule change. As discussed above, the Beneficial Holders Rule and other minimum number of holders requirements are important to ensure that trading in exchange listed securities is fair and orderly and not susceptible to manipulation, and the Exchange does not sufficiently explain why its proposed modification of these requirements is consistent with the Exchange Act. While the Exchange also proposes to replace the existing Minimum Shares Outstanding Rule with a requirement that each series of Exchange Traded Fund Shares have a sufficient number of shares outstanding at the commencement of trading to facilitate the formation of at least one creation unit, the Exchange does not sufficiently explain why this is an appropriate substitute for its existing standards. Creation unit sizes could be highly variable, since they are determined at the discretion of the issuer of Exchange Traded Fund Shares, and the Exchange has not articulated how this new standard would effectively support fair and orderly markets, address the risks of manipulation, and otherwise be consistent with Section 6(b)(5) and other relevant provisions of the Exchange Act. The Exchange concludes that the existence of the creation and redemption process, daily portfolio transparency, and a sufficient number of shares outstanding to allow for the formation of at least one creation unit would ensure that market participants are able to redeem shares and thereby support the proper functioning of the arbitrage mechanism. The Exchange, however, fails to explain in sufficient detail how an efficient and effective arbitrage mechanism could result for an illiquid series of Exchange Traded Fund Shares held by very few beneficial holders and with only one creation unit of Exchange Traded Fund Shares outstanding. The Exchange presents evidence that, of the over 350 funds whose shares are currently listed on Nasdaq that would be eligible to be listed under Nasdaq Rule 5704, only two had a single creation unit E:\FR\FM\06APN1.SGM 06APN1 17874 Federal Register / Vol. 86, No. 64 / Tuesday, April 6, 2021 / Notices outstanding, and that the remaining funds have, on average, shares outstanding equal to approximately 300 creation units. However, this data does not establish that arbitrage opportunities would sufficiently mitigate manipulation concerns for all series of Exchange Traded Fund Shares, including those with only a single creation unit outstanding and those overlying a portfolio of instruments that are illiquid. Finally, while the Exchange asserts that its surveillance procedures and trading halt authority would provide for additional investor protections by mitigating any abnormal trading that would affect Exchange Traded Fund Shares prices, it does not offer any explanation of the basis for that view or provide any supporting information or evidence to support its conclusion. Notably, the Exchange does not explain how any of its specific existing surveillance procedures or administration of its trading halt authority effectively address, in the absence of the Beneficial Holders Rule 27 and under the proposed replacement of the Minimum Shares Outstanding Rule, manipulation concerns and other regulatory risks to fair and orderly markets, investor protection, and the public interest. Accordingly, the Commission is unable to assess whether the Exchange’s assertion has merit. The Commission identified all of these concerns in the OIP, but the Exchange has not responded or provided additional data addressing these concerns.28 As stated above, under 27 See supra note 25 and accompanying text. OIP, supra note 7. The commenter asserts that the creation and redemption processes, which tap into the liquidity of the underlying holdings, coupled with the enhanced disclosures mandated under Rule 6c–11 under the 1940 Act, mitigate manipulation concerns. See SIFMA Letter, supra note 14, at 3. However, neither the Exchange nor the commenter explains why arbitrage opportunities would sufficiently mitigate manipulation concerns for the full range of ETFs, including ETFs overlying a portfolio of instruments that are themselves illiquid, or where market interest in the ETF is not sufficient to attract effective arbitrage activity. While the Exchange and the commenter assert that certain disclosures under Rule 6c–11 under the 1940 Act provide investors with transparency into the holdings of the underlying portfolio and additional insight into the effectiveness of an ETF’s arbitrage (see Notice, supra note 3, 85 FR at 48012, 48015; SIFMA Letter, supra note 14, at 3–4; supra note 13 and accompanying text), neither the Exchange nor the commenter sufficiently explains how such disclosures might prevent manipulation. In addition, while the commenter states that its survey data showed that an ETF’s number of shareholders, level of assets, and liquidity tended to improve after three years of operation as compared to one year, the commenter does not assert that the survey addressed the concerns about potential manipulation that the proposal raises, as described above. khammond on DSKJM1Z7X2PROD with NOTICES 28 See VerDate Sep<11>2014 17:34 Apr 05, 2021 Jkt 253001 the Commission’s Rules of Practice, the ‘‘burden to demonstrate that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder . . . is on the self-regulatory organization [‘SRO’] that proposed the rule change.’’ 29 The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding, and any failure of an SRO to provide this information may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act and the applicable rules and regulations.30 The Commission concludes that, because Nasdaq has not demonstrated that its proposal is designed to prevent fraudulent and manipulative acts and practices or to protect investors and the public interest, the Exchange has not met its burden to demonstrate that its proposal is consistent with Section 6(b)(5) of the Exchange Act.31 For this reason, the Commission must disapprove the proposal. IV. Conclusion For the reasons set forth above, the Commission does not find, pursuant to Section 19(b)(2) of the Exchange Act,32 that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, with Section 6(b)(5) of the Exchange Act.33 It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act, that proposed rule change SR– NASDAQ–2020–017 is disapproved. 29 Rule 700(b)(3), Commission Rules of Practice, 17 CFR 201.700(b)(3). 30 See id. 31 In disapproving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). Although the commenter (see SIFMA Letter, supra note 14, at 4) asserts that the current Beneficial Holders Rule puts newer and smaller sponsors at an unnecessary disadvantage to larger sponsors having the enterprise-wide scale and distribution reach to gather assets in the months after launch, neither the commenter nor the Exchange has provided data to support this conclusion. 32 15 U.S.C. 78s(b)(2). 33 15 U.S.C. 78f(b)(5). PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–06987 Filed 4–5–21; 8:45 am] BILLING CODE 8011–01–P SOCIAL SECURITY ADMINISTRATION [Docket No: SSA–2021–0007] Agency Information Collection Activities: Proposed Request The Social Security Administration (SSA) publishes a list of information collection packages requiring clearance by the Office of Management and Budget (OMB) in compliance with Public Law 104–13, the Paperwork Reduction Act of 1995, effective October 1, 1995. This notice includes revisions of OMB-approved information collections. SSA is soliciting comments on the accuracy of the agency’s burden estimate; the need for the information; its practical utility; ways to enhance its quality, utility, and clarity; and ways to minimize burden on respondents, including the use of automated collection techniques or other forms of information technology. Mail, email, or fax your comments and recommendations on the information collection(s) to the OMB Desk Officer and SSA Reports Clearance Officer at the following addresses or fax numbers. (OMB) Office of Management and Budget, Attn: Desk Officer for SSA Comments: https://www.reginfo.gov/ public/do/PRAMain. Submit your comments online, referencing Docket ID Number [SSA–2021–0007]. (SSA) Social Security Administration, OLCA, Attn: Reports Clearance Director, 3100 West High Rise, 6401 Security Blvd., Baltimore, MD 21235, Fax: 410–966–2830, Email address: OR.Reports.Clearance@ssa.gov Or you may submit your comments online through https://www.reginfo.gov/ public/do/PRAMain, referencing Docket ID Number [SSA–2021–0007]. The information collections below are pending at SSA. SSA will submit them to OMB within 60 days from the date of this notice. To be sure we consider your comments, we must receive them no later than June 7, 2021. Individuals can obtain copies of the collection instruments by writing to the above email address. 1. Application for Mother’s or Father’s Insurance Benefits—20 CFR 404.339– 34 17 E:\FR\FM\06APN1.SGM CFR 200.30–3(a)(12). 06APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 64 (Tuesday, April 6, 2021)]
[Notices]
[Pages 17871-17874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06987]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91446; File No. SR-NASDAQ-2020-017]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Disapproving a Proposed Rule Change To Amend Nasdaq Rule 5704

March 31, 2021.

I. Introduction

    On July 23, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend certain listing 
requirements relating to maintaining a minimum number of beneficial 
holders and minimum number of shares outstanding. The proposed rule 
change was published for comment in the Federal Register on August 7, 
2020.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89464 (August 4, 
2020), 85 FR 48012 (``Notice'').
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    On September 10, 2020, pursuant to Section 19(b)(2) of the Exchange 
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 November 5, 2020, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On January 26, 2021, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\ The Commission has 
received comment letters on the proposed rule change.\9\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89823, 85 FR 57895 
(September 16, 2020).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 90355, 85 FR 71977 
(November 12, 2020) (``OIP'').
    \8\ See Securities Exchange Act Release No. 90994, 86 FR 7750 
(February 1, 2021).
    \9\ Comments on the proposed rule change can be found on the 
Commission's website at: https://www.sec.gov/comments/sr-nasdaq-2020-017/srnasdaq2020017.htm.
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    This order disapproves the proposed rule change because, as 
discussed below, Nasdaq has not met its burden under the Exchange Act 
and the Commission's Rules of Practice to demonstrate that its proposal 
is consistent with the requirements of Exchange Act Section 6(b)(5), 
and, in particular, the requirement that the rules of a national 
securities exchange be designed ``to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \10\
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    \10\ 15 U.S.C. 78f(b)(5).
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II. Description of the Proposal

    As described in detail in the Notice and OIP, the Exchange proposes 
to amend Nasdaq Rule 5704 to: (1) Remove the requirement that, twelve 
months after the commencement of trading on the Exchange, a series of 
Exchange Traded Fund Shares must have 50 or more beneficial holders 
(``Beneficial Holders Rule''); and (2) replace its existing minimum 
number of shares requirement (``Minimum Shares Outstanding Rule'') with 
a requirement that each series of Exchange Traded Fund Shares have a 
sufficient number of shares outstanding at the commencement of trading 
to facilitate the formation of at least one creation unit.\11\
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    \11\ Currently, Nasdaq Rule 5704(b)(1)(A) provides that the 
Exchange will establish a minimum number of Exchange Traded Fund 
Shares required to be outstanding at the time of commencement of 
trading on the Exchange.
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    The Exchange asserts that the Beneficial Holders Rule is no longer 
necessary. The Exchange argues that the requirements of Rule 6c-11 
under the Investment Company Act of 1940 (``1940 Act''), coupled with 
the existing creation and redemption process, mitigate the potential 
lack of liquidity that, according to the Exchange, the Beneficial 
Holders Rule was intended to address.\12\ The Exchange further asserts 
that requiring a sufficient number of shares to be outstanding at all 
times to facilitate the formation of at least one creation unit, 
together with the daily portfolio transparency and other enhanced 
disclosure requirements of

[[Page 17872]]

Rule 6c-11 under the 1940 Act,\13\ will facilitate an effective 
arbitrage mechanism and provide market participants and investors with 
sufficient transparency into the holdings of the underlying portfolio, 
and ensure that the trading price in the secondary market remains in 
line with the per-share value of a fund's portfolio.
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    \12\ In contrast, Nasdaq believes that the shareholder 
requirement applicable to common stock is a measure of liquidity 
designed to help assure that there will be sufficient investor 
interest and trading to support price discovery once a security is 
listed. See Notice, supra note 3 at 48012, n.6.
    \13\ As an example, the Exchange notes that Rule 6c-11(c)(1)(vi) 
under the 1940 Act requires additional disclosure if the premium or 
discount is in excess of 2% for more than seven consecutive days and 
argues that this disclosure would provide additional transparency to 
investors in the event that the trading value and the underlying 
portfolio deviate for an extended period of time, which could 
indicate an inefficient arbitrage mechanism.
---------------------------------------------------------------------------

    Specifically with respect to arbitrage, the Exchange states that 
the arbitrage mechanism relies on the fact that shares of a fund can be 
created and redeemed and that shares of a fund are able to flow into or 
out of the market when the price of the fund is not aligned with the 
net asset value per share of the portfolio. The resulting buying and 
selling of the shares of the fund, as well as the underlying portfolio 
components, generally causes the market price and the net asset value 
per share to converge. In addition, the Exchange states that the proper 
functioning of the arbitrage mechanism is reliant on the presence of 
authorized participants (``APs'') that are eligible to facilitate 
creations and redemptions with the fund and support the liquidity of 
the fund. As a result, the Exchange states that the AP is able to buy 
and sell Exchange Traded Fund Shares from both the fund and investors. 
Because Exchange Traded Fund Shares can be created and redeemed ``in-
kind'' and do not have an upper limit of the number of shares that can 
be outstanding, an AP can fulfill customer orders or take advantage of 
arbitrage opportunities regardless of the number of shares currently 
outstanding. Thus, the Exchange believes that, unlike common stock, the 
liquidity of Exchange Traded Fund Shares is not dependent on the number 
of shares currently outstanding or the number of shareholders, but on 
the availability of APs to transact in the Exchange Traded Fund Shares 
primary market.
    To support these contentions, the Exchange provides information, 
during a two-month observation period, regarding how closely two 
funds--the SPY and QQQ--tracked their respective underlying indexes, as 
well as data regarding creation and redemption activity in those two 
funds during the same observation period. The Exchange asserts that a 
symbiotic relationship exists between the disclosure requirements of 
Rule 6c-11 under the 1940 Act, the ability of the AP to create and 
redeem shares of a fund, and the functioning of the arbitrage mechanism 
that helps to ensure that the trading price in the secondary market is 
at fair value. According to the Exchange, this renders the need for a 
Beneficial Holders Rule as duplicative and unnecessary.
    The Exchange further asserts that, in order for fund redemptions to 
be executed in support of the arbitrage mechanism, it is appropriate 
that, in lieu of the Beneficial Holders Rule, the fund have a 
sufficient number of shares outstanding in order to facilitate the 
formation of at least one creation unit on an initial and continued 
listing basis. The Exchange claims that the existence of the creation 
and redemption process, daily portfolio transparency, as well as a 
sufficient number of shares outstanding to allow for the formation of 
at least one creation unit, ensures that market participants are able 
to redeem shares and thereby support the proper functioning of the 
arbitrage mechanism. According to the Exchange, of the more than 350 
funds currently listed on Nasdaq that would be eligible to be listed 
under Nasdaq Rule 5704, only two had a single creation unit 
outstanding. The remaining funds have, on average, shares outstanding 
equal to approximately 300 creation units.
    In addition, the Exchange states that its surveillance program for, 
and its ability to halt trading in, Exchange Traded Fund Shares provide 
for additional investor protections by further mitigating any abnormal 
trading that would affect the prices of Exchange Traded Fund Shares.
    The Commission received two comment letters on the proposal, one 
comment in support of the proposal and one comment unrelated to the 
proposal.\14\ The commenter in favor of the proposal states that the 
Beneficial Holders Rule ``does not appear to provide any meaningful 
investor-protection benefits.'' \15\ Specifically, the commenter 
expresses the view that the liquidity of shares of an exchange-traded 
fund (``ETF'') is primarily a function of the liquidity of the ETF's 
underlying securities, that the marketplace taps into this liquidity 
through the creation and redemption and arbitrage processes, and that 
this mitigates potential price manipulation concerns.\16\ In addition, 
the commenter believes that the enhanced disclosure requirements of 
Rule 6c-11 under the 1940 Act,\17\ including those relating to an ETF's 
portfolio holdings and when an ETF's premium or discount exceeds 2% for 
more than seven consecutive days, will help facilitate effective 
arbitrage. The commenter conducted a survey of its members that sought 
information on level of assets, number of beneficial holders, and 
various trading measures of newly-listed ETFs over different periods 
following initial listing, and concluded that the number of 
shareholders in an ETF does not appear to be a significant 
consideration in an ETF's sponsor's decision to delist and terminate an 
ETF and that this requirement does not appear to offer investor 
protection benefits.\18\
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    \14\ See Letter from Timothy W. Cameron, Asset Management 
Group--Head, and Lindsey Weber Keljo, Asset Management Group--
Managing Director and Associate General Counsel, SIFMA AMG (December 
18, 2020) (``SIFMA Letter''). The second comment letter received was 
made in connection with a different Nasdaq rule proposal, therefore, 
this second comment letter is not addressed here. See Letter from 
Rungsun Pakyo Gunkoom (August 4, 2020) (referencing the file number 
to this proposed rule change but commenting on a different Nasdaq 
proposal).
    \15\ SIFMA Letter, supra note 14, at 3.
    \16\ See id.
    \17\ See id. at 3-4. The commenter also states that the 
Beneficial Holders Rule puts newer and smaller sponsors at an 
unnecessary disadvantage to larger sponsors having the enterprise-
wide scale and distribution reach to gather assets in the months 
after launch. See id.
    \18\ See id.
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III. Discussion and Commission Findings

    The Commission must consider whether Nasdaq's proposal is 
consistent with Section 6(b)(5) of the Exchange Act, which requires, in 
relevant part, that the rules of a national securities exchange be 
designed ``to prevent fraudulent and manipulative acts and practices'' 
and ``to protect investors and the public interest.'' \19\ Under the 
Commission's Rules of Practice, the ``burden to demonstrate that a 
proposed

[[Page 17873]]

rule change is consistent with the Exchange Act and the rules and 
regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \20\
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78(f)(b)(5).
    \20\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\21\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\22\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\23\
---------------------------------------------------------------------------

    \21\ See id.
    \22\ See id.
    \23\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
---------------------------------------------------------------------------

    The Commission has consistently recognized the importance of the 
minimum number of holders and other similar requirements, stating that 
such listing standards help ensure that exchange listed securities have 
sufficient public float, investor base, and trading interest to provide 
the depth and liquidity necessary to promote fair and orderly 
markets.\24\ As stated by a commenter, the minimum number of holders 
requirement also helps to mitigate the risks of manipulation.\25\
---------------------------------------------------------------------------

    \24\ The Commission considers distribution standards, including 
minimum number of holders and number of shares outstanding 
requirements, to be important means of promoting fair and orderly 
markets. See, e.g., Securities Exchange Act Release No. 57785 (May 
6, 2008), 73 FR 27597 (May 13, 2008) (SR-NYSE-2008-17) (stating that 
the distribution standards, which include exchange holder and number 
of shares outstanding requirements ``. . . should help to ensure 
that the [Special Purpose Acquisition Company's] securities have 
sufficient public float, investor base, and liquidity to promote 
fair and orderly markets''); Securities Exchange Act Release No. 
86117 (June 14, 2019), 84 FR 28879 (June 20, 2018) (SR-NYSE-2018-46) 
(disapproving a proposal to reduce the minimum number of public 
holders continued listing requirement applicable to Special Purpose 
Acquisition Companies from 300 to 100).
    \25\ See SIFMA Letter, supra note 14, at 3 (stating that the 
Beneficial Holders Rule was intended to address ``potential price 
manipulation,'' among other things).
---------------------------------------------------------------------------

    As discussed above, the Exchange is proposing to (1) remove the 
Beneficial Holders Rule applicable to Exchange Traded Fund Shares 
listed on Nasdaq, and (2) replace its existing Minimum Shares 
Outstanding Rule with a requirement that each series of Exchange Traded 
Fund Shares have a sufficient number of shares outstanding at the 
commencement of trading to facilitate the formation of at least one 
creation unit.\26\ In support of its proposal, the Exchange asserts 
that the Beneficial Holders Rule is no longer necessary because the 
requirements of Rule 6c-11 under the 1940 Act, coupled with the 
existing creation and redemption process, mitigate the potential lack 
of liquidity that Nasdaq believes the Beneficial Holders Rule was 
intended to address. However, the Exchange does not sufficiently 
support its assertions under the Exchange Act, particularly where a 
series of Exchange Traded Fund Shares is permitted to have a very small 
number of beneficial holders. For example, while the Exchange provides 
data with respect to two widely held and highly liquid funds, SPY and 
QQQ, and explains the role of APs in the creation and redemption 
process, it does not sufficiently address how the arbitrage mechanism 
will ensure Exchange Traded Fund Shares with very few beneficial 
holders would be sufficiently liquid to support fair and orderly 
markets. The Exchange also does not discuss in sufficient detail the 
potential inefficiencies in the arbitrage mechanism that might occur 
with illiquid Exchange Traded Fund Shares that have very few holders, 
and the impact that would have on the ability of the arbitrage 
mechanism to effectively mitigate the risks of manipulation. In 
addition, the Exchange does not sufficiently explain how an efficient 
and effective arbitrage mechanism and sufficient liquidity could result 
for a series of Exchange Traded Fund Shares held only by a very few 
number of buy-and-hold investors and thereby mitigate manipulation 
risks. Further, the Exchange does not sufficiently address the impact 
of creation unit size on the efficiency of the arbitrage mechanism. For 
example, with respect to a series of illiquid Exchange Traded Fund 
Shares with very few beneficial holders, the Exchange does not describe 
how the proposal is designed to mitigate the risks of manipulation if 
the creation unit size for the Exchange Traded Fund Shares is large in 
comparison to the total number of Exchange Traded Fund Shares 
outstanding. The Exchange provides no data or analysis to support its 
position, other than with respect to the SPY and QQQ, two highly liquid 
and widely held ETFs, and the number and size of the creation units for 
existing Exchange Traded Fund Shares. In fact, although the Exchange 
discusses risks relating to lack of liquidity, the Exchange fails to 
provide any analysis regarding susceptibility to manipulation under the 
Exchange Act in the proposed rule change. As discussed above, the 
Beneficial Holders Rule and other minimum number of holders 
requirements are important to ensure that trading in exchange listed 
securities is fair and orderly and not susceptible to manipulation, and 
the Exchange does not sufficiently explain why its proposed 
modification of these requirements is consistent with the Exchange Act.
---------------------------------------------------------------------------

    \26\ The Commission identified its concern in the OIP that, 
while Nasdaq states that it would require that a sufficient number 
of shares to be outstanding at ``all times'' to facilitate the 
formation of at least one creation unit, proposed Nasdaq Rule 
5704(b)(1)(A) establishes that requirement ``at the time of 
commencement of trading on Nasdaq,'' making it an initial and not a 
continued listing standard. See OIP, supra note 7, 85 FR at 71978, 
n.14. As discussed below, the Exchange has not responded to the 
concerns raised in the OIP.
---------------------------------------------------------------------------

    While the Exchange also proposes to replace the existing Minimum 
Shares Outstanding Rule with a requirement that each series of Exchange 
Traded Fund Shares have a sufficient number of shares outstanding at 
the commencement of trading to facilitate the formation of at least one 
creation unit, the Exchange does not sufficiently explain why this is 
an appropriate substitute for its existing standards. Creation unit 
sizes could be highly variable, since they are determined at the 
discretion of the issuer of Exchange Traded Fund Shares, and the 
Exchange has not articulated how this new standard would effectively 
support fair and orderly markets, address the risks of manipulation, 
and otherwise be consistent with Section 6(b)(5) and other relevant 
provisions of the Exchange Act. The Exchange concludes that the 
existence of the creation and redemption process, daily portfolio 
transparency, and a sufficient number of shares outstanding to allow 
for the formation of at least one creation unit would ensure that 
market participants are able to redeem shares and thereby support the 
proper functioning of the arbitrage mechanism. The Exchange, however, 
fails to explain in sufficient detail how an efficient and effective 
arbitrage mechanism could result for an illiquid series of Exchange 
Traded Fund Shares held by very few beneficial holders and with only 
one creation unit of Exchange Traded Fund Shares outstanding. The 
Exchange presents evidence that, of the over 350 funds whose shares are 
currently listed on Nasdaq that would be eligible to be listed under 
Nasdaq Rule 5704, only two had a single creation unit

[[Page 17874]]

outstanding, and that the remaining funds have, on average, shares 
outstanding equal to approximately 300 creation units. However, this 
data does not establish that arbitrage opportunities would sufficiently 
mitigate manipulation concerns for all series of Exchange Traded Fund 
Shares, including those with only a single creation unit outstanding 
and those overlying a portfolio of instruments that are illiquid.
    Finally, while the Exchange asserts that its surveillance 
procedures and trading halt authority would provide for additional 
investor protections by mitigating any abnormal trading that would 
affect Exchange Traded Fund Shares prices, it does not offer any 
explanation of the basis for that view or provide any supporting 
information or evidence to support its conclusion. Notably, the 
Exchange does not explain how any of its specific existing surveillance 
procedures or administration of its trading halt authority effectively 
address, in the absence of the Beneficial Holders Rule \27\ and under 
the proposed replacement of the Minimum Shares Outstanding Rule, 
manipulation concerns and other regulatory risks to fair and orderly 
markets, investor protection, and the public interest. Accordingly, the 
Commission is unable to assess whether the Exchange's assertion has 
merit.
---------------------------------------------------------------------------

    \27\ See supra note 25 and accompanying text.
---------------------------------------------------------------------------

    The Commission identified all of these concerns in the OIP, but the 
Exchange has not responded or provided additional data addressing these 
concerns.\28\ As stated above, under the Commission's Rules of 
Practice, the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization [`SRO'] that 
proposed the rule change.'' \29\ The description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis of 
its consistency with applicable requirements must all be sufficiently 
detailed and specific to support an affirmative Commission finding, and 
any failure of an SRO to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rules and regulations.\30\ The Commission concludes that, 
because Nasdaq has not demonstrated that its proposal is designed to 
prevent fraudulent and manipulative acts and practices or to protect 
investors and the public interest, the Exchange has not met its burden 
to demonstrate that its proposal is consistent with Section 6(b)(5) of 
the Exchange Act.\31\ For this reason, the Commission must disapprove 
the proposal.
---------------------------------------------------------------------------

    \28\ See OIP, supra note 7. The commenter asserts that the 
creation and redemption processes, which tap into the liquidity of 
the underlying holdings, coupled with the enhanced disclosures 
mandated under Rule 6c-11 under the 1940 Act, mitigate manipulation 
concerns. See SIFMA Letter, supra note 14, at 3. However, neither 
the Exchange nor the commenter explains why arbitrage opportunities 
would sufficiently mitigate manipulation concerns for the full range 
of ETFs, including ETFs overlying a portfolio of instruments that 
are themselves illiquid, or where market interest in the ETF is not 
sufficient to attract effective arbitrage activity. While the 
Exchange and the commenter assert that certain disclosures under 
Rule 6c-11 under the 1940 Act provide investors with transparency 
into the holdings of the underlying portfolio and additional insight 
into the effectiveness of an ETF's arbitrage (see Notice, supra note 
3, 85 FR at 48012, 48015; SIFMA Letter, supra note 14, at 3-4; supra 
note 13 and accompanying text), neither the Exchange nor the 
commenter sufficiently explains how such disclosures might prevent 
manipulation. In addition, while the commenter states that its 
survey data showed that an ETF's number of shareholders, level of 
assets, and liquidity tended to improve after three years of 
operation as compared to one year, the commenter does not assert 
that the survey addressed the concerns about potential manipulation 
that the proposal raises, as described above.
    \29\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \30\ See id.
    \31\ In disapproving this proposed rule change, the Commission 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). Although 
the commenter (see SIFMA Letter, supra note 14, at 4) asserts that 
the current Beneficial Holders Rule puts newer and smaller sponsors 
at an unnecessary disadvantage to larger sponsors having the 
enterprise-wide scale and distribution reach to gather assets in the 
months after launch, neither the commenter nor the Exchange has 
provided data to support this conclusion.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act,\32\ that the proposed 
rule change is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange, and in particular, with Section 6(b)(5) of the 
Exchange Act.\33\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78s(b)(2).
    \33\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-NASDAQ-2020-017 is 
disapproved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-06987 Filed 4-5-21; 8:45 am]
BILLING CODE 8011-01-P

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