On April 6, 2020, the Securities and Exchange Commission granted the request of Cboe BZX Exchange, Inc. (CBOE) to change BZX Rule 14.11(1).1 This will accelerate approval of Exchange-Traded Fund shares and series of ETF shares that are permitted to operate in reliance on Rule 6c-112 under the Investment Company Act of 1940. The SEC granted a similar request for relief to Nasdaq Stock Market LLC (Nasdaq)3 (together with CBOE, Exchanges) to adopt new Nasdaq Rule 5704, with similar amendments to other Nasdaq rules, on April 3, 2020. NYSE Arca is expected to obtain similar approval shortly.
Under these new rules adopted by the Exchanges and approved by the SEC, ETFs that meet the requirements of Rule 6c-11 may be listed on the Exchanges without the need to meet other generic listing standards (subject to certain other conditions set forth below). Importantly, under these new Exchange rules, ETFs that meet the Rule 6c-11 requirements also may be listed without the Exchanges obtaining approval from the SEC for a rule change under rule 19b-4 under the Securities Exchange Act of 1934. These new rules accordingly remove a potential obstacle to listing for many ETFs and further the SEC’s stated goal of harmonizing regulatory requirements applicable to ETFs.4
The new rules adopted by the Exchanges retain certain conditions that must be satisfied in order for ETFs to be listed and traded. These conditions are:
- Placing fire walls and procedures to prevent the use and dissemination of material, non-public information regarding the applicable ETF index and portfolio;
- Implementing and maintaining of written surveillance procedures for ETF shares that (i) properly monitor the trading of securities during all trading session and (ii) deter and detect violation of rules of CBOE and Nasdaq and applicable federal securities laws;
- Communicating as needed regarding trading in ETF shares and certain of their applicable underlying components, with other markets that are members of the Intermarket Surveillance Group or with which each Exchange has in place a comprehensive surveillance-sharing agreement;
- Performing ongoing surveillance of ETF shares listed on each Exchange in order to ensure compliance with Rule 6c-11 and the 1940 Act;
- Requiring periodic certifications from the issuer that it has maintained compliance with Rule 6c-11 and applicable Exchange rules; and
- Delisting a series of ETF shares if, following the initial 12-month period after commencement of trading, there are fewer than 50 beneficial holders of such series.
1) See SEC Re. No. 34-88566.
2) See Exchange-Traded Funds, Release Nos. 33-10695, IC-33646 (09/25/2019); 54 FR 57162 (10/24/2019).
3) See SEC Re. No. 34-88561.
4) For further information, please refer to Dechert OnPoint, SEC Adopts Final ETF Rule and Issues Related Exchange Act Relief.