[Federal Register Volume 75, Number 59 (Monday, March 29, 2010)]
[Notices]
[Pages 15480-15482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-6838]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61757; File No. SR-NASDAQ-2010-036)]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Clarify and Modify the Applicability of Nasdaq Rule 5615 To Exchange
Traded Funds
March 22, 2010.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on March 11, 2010, The NASDAQ Stock Market LLC (``Nasdaq'' or
``the Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by Nasdaq. Nasdaq
has designated the proposed rule change as constituting a non-
controversial rule change under Rule 19b-4(f)(6) under the Act,\3\
which renders the proposal effective upon filing with the Commission.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to clarify and modify the applicability of
Nasdaq Rule 5615 to Exchange Traded Funds. The text of the proposed
rule change is below. Proposed new language is in italics; proposed
deletions are in [brackets].\4\
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\4\ Changes are marked to the rules of The NASDAQ Stock Market
LLC found at http://nasdaq.cchwallstreet.com.
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* * * * *
5615. Exemptions from Certain Corporate Governance Requirements
This rule provides the exemptions from the corporate governance
rules afforded to certain types of Companies, and sets forth the phase-
in schedules for initial public offerings, Companies emerging from
bankruptcy and Companies transferring from other markets. This rule
also describes the applicability of the corporate governance rules to
controlled companies and sets forth the phase-in schedule afforded to
Companies ceasing to be controlled companies.
(a) Exemptions to the Corporate Governance Requirements
(1) Asset-backed Issuers and Other Passive Issuers
The following are exempt from the requirements relating to Majority
Independent Board {Rule 5605(b){time} , Audit Committee {Rule
5605(c){time} , Independent Director Oversight of Executive Officer
Compensation {Rule 5605(d){time} and Director Nominations {Rule
5605(e){time} , the Controlled Company Exemption {Rule
5615(c)(2){time} , and Code of Conduct {Rule 5610{time} :
(A) No change.
(B) issuers, such as unit investment trusts, including Portfolio
Depository Receipts, which [that] are organized as trusts or other
unincorporated associations that do not have a board of directors or
persons acting in a similar capacity and whose activities are limited
to passively owning or holding (as well as administering and
distributing amounts in respect of) securities, rights, collateral or
other assets on behalf of or for the benefit of the holders of the
listed securities.
* * * * *
(2)-(4) No change.
(5) Management Investment Companies
Management investment companies (including business development
companies) are subject to all the requirements of the Rule 5600 Series,
except that management investment companies registered under the
Investment Company Act of 1940 are exempt from the Independent
Directors requirement, the Independent Director Oversight of Executive
Officer Compensation and Director Nominations requirements, and the
Code of Conduct requirement, set forth in Rules 5605(b), (d) and (e)
and 5610, respectively. In addition, management investment companies
that are Index Fund Shares and Managed Fund Shares, as defined in Rules
5705(b) and 5735, are exempt from the Audit Committee requirements set
forth in Rule 5605(c), except for the applicable requirements of SEC
Rule 10A-3.
IM-5615-4. Management Investment Companies
Management investment companies registered under the Investment
Company Act of 1940 are already subject to a pervasive system of
federal regulation in certain areas of corporate governance covered by
5600. In light of this, Nasdaq exempts from Rules 5605(b), (d), (e) and
5610 management investment companies registered under the Investment
Company Act of 1940. Business development companies, which are a type
of closed-end management investment company defined in Section 2(a)(48)
of the
[[Page 15481]]
Investment Company Act of 1940 that are not registered under that Act,
are required to comply with all of the provisions of the Rule 5600
Series. Management investment companies that are Index Fund Shares and
Managed Fund Shares are exempt from the Audit Committee requirements
set forth in Rule 5605(c), except for the applicable requirements of
SEC Rule 10A-3.
(b)-(c) No change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Nasdaq has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq is proposing to clarify and modify the applicability of
certain of its corporate governance requirements to exchange traded
funds (``ETFs''). Nasdaq currently lists ETFs formed as unit investment
trusts (``UITs'') or as management investment companies.\5\ ETFs
organized as UITs are listed under Rule 5705(a) and called Portfolio
Depository Receipts, while ETFs organized as management investment
companies are listed under Rule 5705(b) and called Index Fund Shares or
listed under Rule 5735 and called Managed Fund Shares. However, the
exemptions available to the corporate governance requirements are not
presently consistent among ETFs organized under these different legal
structures.
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\5\ Section 4 of the Investment Company Act of 1940 classifies
investment companies in three principal classes: Face-amount
certificate companies, UITs, and management companies. 15 U.S.C.
80a-4. Management companies are further divided into open-end and
closed-end companies. 15 U.S.C. 80a-5(a). All ETFs are open-end
companies.
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Nasdaq Rule 5615(a)(1)(B) exempts UITs from certain corporate
governance requirements.\6\ Because Portfolio Depository Receipts are
UITs, they are exempt from, among other things, the requirements in
Rule 5605(b)-(e) and Rule 5610 related to majority independent board,
audit committees, independent director oversight of executive officer
compensation and director nominations, and the code of conduct under
the corporate governance requirements, respectively. Nasdaq proposes to
amend Rule 5615(a)(1)(B) to specifically add a reference to Portfolio
Depository Receipts in order to remove any ambiguity about the
applicability of these exemptions to Portfolio Depository Receipts.
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\6\ Specifically, Rule 5615(a)(1)(B) exempts ``issuers, such as
unit investment trusts, that are organized as trusts or other
unincorporated associations that do not have a board of directors or
persons acting in a similar capacity and whose activities are
limited to passively owning or holding (as well as administering and
distributing amounts in respect of) securities, rights, collateral
or other assets on behalf of or for the benefit of the holders of
the listed securities.''
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Nasdaq Rule 5615(a)(5) and IM-5615-4 grant exemptions for ETFs that
are structured as management investment companies from the requirements
of Rule 5605(b) (majority independent board), Rules 5605(d) and (e)
(independent director oversight of executive officer compensation and
director nominations), and Rule 5610 (code of conduct). Unlike Rule
5615(a)(1), Rule 5615(a)(5) does not include an exemption from Rule
5605(c), relating to Nasdaq's audit committee requirements. As such,
ETFs that are formed as management investment companies and listed as
Index Fund Shares or Managed Fund Shares are currently subject to the
audit committee requirements, whereas ETFs that are formed as UITs and
listed as Portfolio Depository Receipts are not subject to those
requirements.
Nasdaq proposes to expand the exemption in Rule 5615(a)(5) and IM-
5615-4 to also exempt ETFs that are formed as management investment
companies from most of the audit committee requirement of Rule 5605(c),
thereby largely eliminating this difference.\7\ Notwithstanding this
proposed change, one difference will remain: ETFs formed as management
investment companies must comply with the applicable provisions of SEC
Rule 10A-3 of the Securities Exchange Act of 1934 \8\ (``SEC Rule 10A-
3'') and the proposed rule change will specifically state that
requirement. This proposed change will conform Nasdaq's treatment of
these ETFs that are management investment companies with that of other
markets.\9\
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\7\ Management investment companies other than ETFs must still
comply with the audit committee requirement of Rule 5605(c) and SEC
Rule 10A-3.
\8\ 17 CFR 240.10A-3.
\9\ NYSEArca Equities Rule 5.3, in part, details specifically
which corporate governance requirements apply to ``special purpose
companies.'' A special purpose company is defined to include a
company listed under NYSEArca Equities Rule 5.2(j)(3), which
contains NYSEArca's provisions for listing ETFs, called Investment
Company Units, which include registered investment companies
organized as UITs or open-end management investment companies. See
also NYSE Listed Company Manual Section 303A.00, which similarly
provides that the NYSE's corporate governance requirements contained
in Section 303A do not apply to securities listed under Section
703.16, relating to Investment Company Units, which can be organized
as unit investment trusts or open-end management investment
companies.
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Moreover, Nasdaq believes that it is appropriate to make these
changes because, as stated in IM-5615-4, these entities are subject to
the Investment Company Act of 1940 and the pervasive system of federal
regulation. This includes, among other things, assigning important
duties of investment company governance, such as approval of investment
advisory contracts, to independent directors.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \10\ in general, and furthers the objectives of Section
6(b)(5) of the Act \11\ in particular, in that it is designed to
promote just and equitable principles of trade, 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. The proposed change is designed to harmonize the
applicability of Nasdaq's corporate governance rules to various types
of ETFs and will treat similarly situated companies in the same manner.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time
[[Page 15482]]
as the Commission may designate, if consistent with the protection of
investors and the public interest, it has become effective pursuant to
Section 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6)(iii)
thereunder.\13\
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to
the Commission written notice of its intent to file the proposed
rule change, along with a brief description and text of the proposed
rule change, at least five business days prior to the date of filing
of the proposed rule change, or such shorter time as designated by
the Commission. The Commission notes that Nasdaq satisfied the five-
day pre-filing notice requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
Normally, a proposed rule change filed under 19b-4(f)(6) may not
become operative prior to 30 days after the date of filing. However,
Rule 19b-4(f)(6)(iii) \14\ permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. Nasdaq has requested that the
Commission waive the 30-day operative delay. In its filing, Nasdaq
requested the waiver in order to provide immediate clarity to its rules
and to eliminate any disparity between its rules and those of other
exchanges with similar exemptions that have been previously approved by
the Commission.
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\14\ 17 CFR 240.19b-4(f)(6)(iii).
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The Commission believes that waiver of the 30-day operative period
is consistent with the protection of investors and the public interest.
The proposed rule change will clarify an ambiguity in Nasdaq's rules,
which should benefit investors, Nasdaq members, and regulators. In
addition, the Commission notes that, as Nasdaq has pointed out, the
changes proposed in this filing would conform certain of Nasdaq's
corporate governance standards to those of other exchanges.\15\
Accordingly, the Commission designates the proposal to be operative
upon filing with the Commission.\16\
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\15\ See supra, note 9.
\16\ For the purposes only of waiving the 30-day operative
delay, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-NASDAQ-2010-036 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2010-036. This
file number should be included on the subject line if e-mail 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 Web site (http://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 Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549-1090 on official business days
between the hours of 10 a.m. and 3 p.m. Copies of the filing also will
be available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NASDAQ-2010-036 and should be submitted on or before April 19, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-6838 Filed 3-26-10; 8:45 am]
BILLING CODE 8011-01-P