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Federal Register / Vol. 86, No. 43 / Monday, March 8, 2021 / Notices
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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 the Exchange, the minimum number of holders requirement is intended to address the risks of manipulation.25
As discussed above, the Exchange is proposing to 1 remove the Beneficial Holders Rule applicable to Fund Shares listed on NYSE Arca, and 2 replace the existing Minimum Shares Outstanding Rules with a requirement that a series of Fund Shares have at least one creation unit outstanding on an initial and continued listing basis. In support of its proposal, the Exchange asserts that the requirements of Rule 6c11 under the 1940 Act, and in particular the website disclosure requirements of Rule 6c 11c and, for Managed Portfolio Shares, the information required to be disseminated including the verified intraday indicative value in connection with the listing and trading of those Shares, together with the existing creation and redemption process and proposed requirement that at least one creation unit is always outstanding, would serve to mitigate the risks of manipulation and the lack of liquidity that the Beneficial Holders Rule was intended to address. However, the Exchange does not sufficiently support its assertions, particularly where a series of Fund Shares is permitted to have a very small number of beneficial holders.
For example, the Exchange does not sufficiently address how the arbitrage mechanism will ensure 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 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 SRNYSE200817 stating that the distribution standards, which include exchange holder and number of shares outstanding requirements . . . should help to ensure that the Special Purpose Acquisition Companys 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 SRNYSE
201846 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 Notice, supra note 3, 85 FR at 40722. See also SIFMA Letter, supra note 14, at 3
acknowledging that the Beneficial Holders Rule was intended to address potential price manipulation, among other things.

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potential inefficiencies in the arbitrage mechanism that might occur with illiquid 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 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 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 Fund Shares is large in comparison to the total number of Fund Shares outstanding. The Exchange provides no data or analysis to support its position, other than noting the number and size of the creation units for existing series of Fund Shares. 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 Rules with a requirement that a series of Fund Shares have a number of shares outstanding equal to 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 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 6b5 and other relevant provisions of the Act. The Exchange argues that requiring at least one creation unit to be outstanding at all times, together with the enhanced disclosure requirements of Rule 6c11, would facilitate an effective arbitrage mechanism that would provide investors with sufficient transparency into the holdings of the underlying portfolio and help ensure that the trading price in the secondary market
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remains in line with the value per share of a funds portfolio. The Exchange, however, fails to explain in sufficient detail how an efficient and effective arbitrage mechanism could result for an illiquid series of Fund Shares held by very few beneficial holders and with only one creation unit of Fund Shares outstanding. The Exchange also does not provide any explanation as to how such series of Fund Shares with only a single creation unit outstanding is therefore less susceptible to manipulation risks on a continued listing basis.
Finally, while the Exchange asserts that its surveillance procedures and trading halt authority would provide for additional investor protections by further mitigating any abnormal trading that would affect the 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 26 and the Minimum Shares Outstanding Rules, 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 Exchanges 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.27 As stated above, under 26 See
supra note 24 and accompanying text.
OIP, supra note 6. 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 6c11 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 6c11 under the 1940 Act provide investors with transparency into the holdings of the underlying portfolio and additional insight into the effectiveness of an ETFs arbitrage see Notice, supra note 3, 85 FR at 40721; SIFMA Letter, supra note 14, at 34, 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 ETFs 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 27 See
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