On September 15, 2020, the SEC issued a notice (Notice) regarding the NYSE Arca, Inc.’s (Exchange) filing of a proposed generic listing rule for certain semi-transparent ETFs (ST ETFs). An ST ETF is an exchange-traded fund that discloses alternative forms of information about its underlying portfolio each day, such as a “proxy” portfolio of securities the return of which is expected to be highly correlated to the return of securities in the ST ETF’s portfolio. Unlike ST ETFs, traditional ETFs disclose detailed information about their complete portfolios as of the business day prior to each trading day. Both types of ETFs are subject to reporting rules under the 1940 Act that require disclosure of their complete portfolios each quarter on a delayed basis.
The proposed generic listing rule would only apply to “proxy portfolio” ST ETFs and would eliminate the need for the Exchange to submit separate applications with the SEC pursuant to Rule 19b-4 under the 1934 Act to list individual proxy portfolio ST ETFs. To-date, ST ETFs have spent significant time during the launch process working with their desired listing exchange in seeking and obtaining SEC approval of their listing applications (commonly referred to as “19b-4 applications”). The 12 “proxy portfolio” ST ETFs trading today spent an average of 175 days to obtain SEC approval of their 19b-4 applications. (Many of these 19b-4 applications were filed in late 2019 when listing rules for ST ETFs were still in development, so 175 days may not be indicative of how long such applications will take going forward. One 19b-4 application filed in 2020 was approved by the SEC 49 days after the exchange filed the application.)
The proposed rule would require the Exchange to file a 19b-4 application with the SEC for a proxy portfolio ST ETF when the ST ETF’s components do not meet the specified conditions of the rule. These conditions would limit the ST ETF’s holdings to certain types of securities (such as U.S. exchange-traded securities that are common stocks, and foreign common stocks that are listed on a foreign exchange that trades at times that are contemporaneous with Exchange’s trading session) and preclude the ST ETF from engaging in short positions in these securities. These requirements mirror limitations that are already included in the exemptive relief that proxy portfolio ST ETFs need to obtain from the SEC for relief from certain 1940 Act requirements. Therefore, the need for future 19b-4 applications for a given proxy portfolio ST ETF listed on the Exchange should be a relatively infrequent occurrence if the proposed rule is adopted until more flexible exemptive relief is available from the SEC.
The Notice is available here: https://www.sec.gov/rules/sro/nysearca/2020/34-89874.pdf