SEC Adopts New Rule on Exchange-Traded Funds
From the Desk of Jim Eccleston at Eccleston Law LLC:
The Securities and Exchange Commission (“SEC”) recently announced that it voted to adopt a new rule and form amendments designed to “modernize” the regulation of exchange-traded funds (“ETFs”). The SEC also specified that it will issue an exemptive order that further harmonizes related relief for broker-dealers.
According to the SEC, ETFs are hybrid investment products not originally allowed under the U.S. securities laws. Their shares trade on an exchange like a stock or closed-end fund, but they also allow identified large institutions to transact directly with the fund. Since 1992, the SEC has issued more than 300 exemptive orders allowing ETFs to operate under the Investment Company Act of 1940. Today, there are approximately 2,000 ETFs with currently over $3.3 trillion in total net assets.
The SEC outlined its goals as establishing a clear and consistent framework for the majority of ETFs operating today, and facilitating greater competition and innovation in the ETF marketplace, providing investors with more choices. According to Rule 6c-11 (the “Rule”), new ETFs will be able to come to market more quickly without the time or expense of applying for individual exemptive relief. All ETFs relying on the Rule and related exemptive order will have to comply with the conditions set forth in the Rule, generally designed to protect investors. These include conditions relating to transparency and disclosure. Let’s highlight main provisions of the Rule.
The Rule will permit ETFs that satisfy certain conditions to operate within the scope of the 1940 Act without obtaining an exemptive order, replacing the conditions set forth in individualized exemptive orders. ETFs must be organized as open-end funds (the structure used by most ETFs) in order to rely on the Rule. ETFs organized as UITs, leveraged or inverse ETFs, ETFs structured as a share class of a multi-class fund, and non-transparent ETFs will not be able to rely on the Rule.
The Rule conditions include the following:
- Transparency. An ETF will be required to provide daily portfolio transparency on its website.
- Custom baskets policies and procedures. An ETF may use baskets that do not reflect a pro-rata representation of the ETF’s portfolio or that differ from the initial basket used in transactions on the same business day (custom baskets) if it adopts written policies and procedures setting forth detailed parameters for the construction and acceptance of custom baskets that are in the best interests of the ETF and its shareholders.
- Website disclosure. An ETF will be required to disclose historical information regarding premiums and discounts and bid-ask spread information on its website, highlighting for investors, the costs of investing and the efficiency of an ETF’s arbitrage process.
The rule, form amendments, and related exemptive relief will be published on the SEC website and in the Federal Register becoming effective 60 days after publication in the Federal Register. There will be a one-year transition period for compliance with the form amendments and with respect to recission of exemptive relief.
The attorneys of Eccleston Law LLC represent investors and advisors nationwide in securities and employment matters. The securities lawyers at Eccleston Law also practice a variety of other areas of practice for financial investors and advisors including Securities Fraud, Compliance Protection, Breach of Fiduciary Duty, FINRA Matters, and much more. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today.
Related Attorneys: James J. Eccleston
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