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SEC Disapproves Nasdaq Proposal to Remove Beneficial Holders Rule for Exchange-Traded Funds

The SEC disapproved a Nasdaq proposed rule change "to amend certain listing requirements relating to maintaining a minimum number of beneficial holders and minimum number of shares outstanding." The proposed changes would have removed the Beneficial Holders Rule for Exchange-Traded Fund Shares and replaced it with a requirement that there be at least one creation unit of shares outstanding.

As described in the Order, Nasdaq proposed to remove the requirement that a series of Exchange-Traded Fund Shares must have 50 or more beneficial holders 12 months after trading commenced. Nasdaq argued ICA Rule 6c-11 ("Exchange-Traded Funds") renders the Beneficial Holders Rule "no longer necessary," as the former requirements mitigate the potential lack of liquidity that the latter requirements were intended to address. The SEC found that Nasdaq did not "sufficiently support its assertions," especially with regard to a series permitted to have a small number of beneficial holders.

Additionally, Nasdaq proposed to require that a series of Exchange-Traded Fund Shares have a sufficient number of shares outstanding to form at least one creation unit at the commencement of trading. The SEC stated that Nasdaq did not sufficiently justify the appropriateness of the substitute, and Nasdaq did not articulate how the new standard would be consistent with SEA Section 6(b)(5).

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