ETF Roundup Issue 2 - April 2017

Author:Ms Laura Flores, Sean Graber, W. John McGuire, Christopher D. Menconi, John J. O'Brien, K. Michael Carlton, Jeremy Esperon, David W. Freese and Philip K.W. Smith
Profession:Morgan Lewis
 
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SEC APPROVES CONTINUED LISTING STANDARDS

The US Securities and Exchange Commission (SEC) recently approved proposals by each of The NASDAQ Stock Market LLC (Nasdaq), Bats BZX Exchange, Inc. (Bats), and NYSE Arca, Inc. (NYSE) (each, an Exchange) to amend its rules to impose continued listing requirements for ETFs listed under an Exchange's generic listing standards (generically-listed products) or in reliance on a 19b-4 order (nongenerically- listed products). Previously, an index-based ETF was only required to comply with certain listing requirements on an initial basis. The amended listing rules, which are substantively similar for each Exchange, follow last year's adoption of generic listing standards for actively managed ETFs, which are required both at the initial listing and on a continuing basis.

The rule changes will require a generically-listed product to maintain the applicable Exchange's generic listing standards on a continuous basis. A non-generically-listed product will be required to comply on a continuous basis with all statements or representations made in its Rule 19b-4 filing regarding

the description of the index, holdings or reference asset (as applicable); limitations on index composition, holdings or reference assets (as applicable); dissemination and availability of index, reference asset or intraday indicative values (as applicable); and the applicability of Exchange rules and surveillance procedures. The new continued listing requirements will impose additional compliance requirements on ETFs. In particular, to the extent not already in place, ETFs will need to develop procedures for monitoring compliance with the listing requirements on a continuous basis. For a passively managed ETF, this may require monitoring compliance by the ETF's underlying index. As noted by commenters on the proposed rule changes, this may result in difficulty for passively managed ETFs that track third-party indexes where the ETF has no control over the index constituents.

In addition, each Exchange amended its rules to specify the delisting procedures due to non-compliance with the continued listing standards. In general, an Exchange will initiate delisting proceedings for an ETF that fails to meet a continued listing requirement. However, the amended rules also state that an Exchange may accept and review an ETF's plan to regain compliance when it fails to meet a continued listing requirement if the plan is submitted within 45 calendar days of the Exchange's notification of deficiency. To supplement an Exchange's surveillance of ETF compliance, the amended rules add a requirement that an ETF promptly notify its Exchange of any non-compliance with the continued listing requirements.

Finally, Nasdaq and NYSE amended their listing rules to require delisting of an ETF if, following the initial 12-month period following commencement of trading on the applicable Exchange, there are fewer than 50 record or beneficial holders of the ETF. Previously, the rules required a delisting only if the minimum record or beneficial holder requirement was not met for "30 or more consecutive trading days." This stricter amended rule may adversely impact newer or smaller ETFs in particular. Bats did not amend its listing rules in this manner.

Nasdaq is scheduled to implement its rule changes by August 1, 2017. Bats and NYSE are scheduled to implement their rule changes by October 1, 2017.

SEC REJECTS BITCOIN ETP

On March 10, the SEC rejected a proposal by Bats to list the Winklevoss Bitcoin Trust (Bitcoin ETP) as the first ETP that would track the price of bitcoin, based largely on concerns regarding the structure of the bitcoin market that would prevent the Exchange from detecting and deterring fraudulent and manipulative conduct as required by the Securities Exchange Act of 1934 (Exchange Act).1

About the Bitcoin ETP

The Bitcoin ETP's investment objective is to track the price of bitcoin, as measured by the clearing price of a two-sided auction that occurs daily on the Gemini Exchange. Bitcoin is a virtual currency issued by and transmitted through a decentralized peer-to-peer bitcoin computer network known as the "Blockchain" that records all bitcoin transactions. The Exchange proposed to list and trade the Bitcoin ETP's shares as commodity ETP shares under its applicable rules. Therefore, the Exchange was required to seek SEC approval of the proposed rule change and had the burden to demonstrate that the proposed rule was consistent with...

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