The SEC proposed a new rule that would modify the approval process for certain exchange-traded funds ("ETFs").
Under proposed Investment Company Act Rule 6c-11, open-ended ETFs would be able to come to market without applying for an exemptive order. Certain ETFs would not be able to rely on the rule, including ETFs organized as unit investment trusts ("UITs"), leveraged ETFs, inverse ETFs and ETFs organized as a share class of a multi-class fund.
ETFs that qualify for the exemptive rule would be required to meet certain conditions, including:
- posting daily portfolio transparency information on their websites;
- using custom baskets only after adopting adequate written policies and procedures;
- adhering to certain recordkeeping requirements; and
- complying with certain website disclosure requirements.
The proposal would rescind previous exemptive relief for ETFs that are able to rely on the rule. The SEC recommended preventing the creation of new ETFs organized using a "master-feeder" structure.
The SEC also proposed amending disclosure obligations for funds organized as UITs.
The SEC will accept comments on the proposal for a period of 60 days after it is published in the Federal Register.
Commentary / Steven Lofchie
The SEC's proposed ETF exemptive rule is a recognition that ETFs have become a "plain-vanilla" form of transaction, even if any individual ETF may be based on a unique investment thesis.
Notably, leveraged ETFs cannot benefit from the exemptive rule (they still will be required to obtain individual exemptive orders). Commissioners Stein and Jackson issued statements expressing skepticism as to the benefits of such ETFs.
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