SEC Adopts Rule to Make ETFs “More Accessible”
On September 26, 2019, the Securities and Exchange Commission (SEC) voted to adopt a new rule and form amendments designed to modernize the regulatory framework for exchange-traded funds (“ETFs”). Rule 6c-11 will permit ETFs that satisfy certain conditions to operate within the scope of the Investment Company Act of 1940 (the “Act”), and come directly to market without the cost and delay of obtaining an exemptive order.
In announcing the Rule’s adoption, the SEC stated that “the adoption will facilitate greater competition and innovation in the ETF marketplace, leading to more choice for investors. It also will allow ETFs to come to market more quickly without the time or expense of applying for individual exemptive relief.”
Rule 6c-11 will be available to ETFs organized as open-end funds, the structure for the vast majority of ETFs today. ETFs organized as unit investment trusts (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.
So what does this mean for companies?
Most ETFs will no longer need to seek individual exemptive relief in order to operate. Rule 6c-11 provides ETFs with the exemptions necessary to operate under the 1940 Act. In addition, the SEC also issued an exemptive order that harmonizes relief needed for ETFs to operate under the Securities Exchange Act of 1934, as amended, and the rules thereunder.
The Rule will also allow ETFs to utilize custom creation and redemption baskets for the purchase and redemption of their shares by authorized participants if the ETF’s investment adviser establishes policies and procedures to ensure that such custom baskets will be created in the best interest of the ETF and its shareholders.
Finally, the Rule will require an ETF to disclose certain information on its website, including: median bid-ask spread over the most recent 30 days, premium and discount information and daily portfolio holdings. These disclosures are intended to inform investors about the costs of investing in ETFs and the efficiency of an ETF’s arbitrage process.
The Rule will go effective 60 days after its publication in the Federal Register, which is when new ETFs will be able to rely on the Rule. Existing ETF exemptive orders for ETFs that are eligible to rely on the Rule will be rescinded one year after the effective date of the Rule.
To read the complete SEC press release “SEC Adopts New Rule to Modernize Regulation of Exchange-Traded Funds,” click here.