Careers

Diversity, Equity & Inclusion

Experience

Innovation

Interactive Maps

Locations

About

Pages

Meet our team of innovators
Ask us how we do it

Professionals

Insights

Services

Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 11 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

Home | Thompson Hine LLP

Atlanta

Chicago

Cincinnati

Cleveland

Columbus

Dayton

Los Angeles

Minneapolis

New York

Silicon Valley

Washington, D.C.

<img style="max-width: 100%;height: auto" width="400" height="140" src="https://www.thregupdate.com/wp-content/uploads/sites/1016/2025/01/GettyImages-1706231587.jpg" class="attachment-lxb_af_3_of_4-wide size-lxb_af_3_of_4-wide wp-post-image" alt="" loading="lazy" />
			The new Trump administration combined with a Republican-controlled House and Senate could usher in the most significant regulatory changes to the ETF industry since 1990. That year, the Republican-led U.S. Securities and Exchange Commission (SEC) granted exemptive relief that gave birth to the ETF, one of the most consequential and innovative financial products in history. Given recent Supreme Court and Circuit court case decisions, opposition to these sweeping changes will have little ability to slow or water down expected regulatory initiatives. We can expect a seismic regulatory shift, with the SEC rapidly moving away from the policies prioritized under the Biden Administration, which focused heavily on ESG disclosure, consumer protection and bringing enforcement cases.
With an emphasis on deregulation, innovation and reducing compliance burdens, we expect that Trump policies implemented by the SEC will preserve the benefits of the ETF product while unleashing the ETF structure for application to a multitude of new types of retail strategies that to date are only available in the private fund industry. Let&rsquo;s examine 10 key areas ETF professionals should monitor now that the Trump Administration is in place:
1. Reversal of Biden Priorities
On January 20, 2025, President Trump issued an executive order that, among other things, prohibits federal agencies including the SEC to not propose or issue any rule in any manner until a department or agency head appointed or designated by the President and consider postponing for 60 days from January 20, 2025, the effective date for any rules that have been issued in any manner but have not taken effect.&nbsp; While the SEC is an independent federal agency and its Chairman is not a member of the President&rsquo;s cabinet, the January 20,2025 executive order shows that the President&rsquo;s influence on the SEC&rsquo;s agenda is substantial.&nbsp; We saw this with the Biden Administration, which placed an emphasis on ESG standards and consumer protection. While the ESG rule was never adopted and the short-lived Climate and ESG Task Force was disbanded, the ESG initiative spawned amendments to Rule 35d-1 (the &ldquo;Names&rdquo; Rule&rdquo;) that the SEC&rsquo;s Division of Investment Management for all practical purposes began implementing before its adoption. ETF product launches have been severely delayed as registrants continue to grapple with the SEC on whether a given name might be misleading.&nbsp; The SEC&rsquo;s consumer protection bent led to the adoption of the Tailored Shareholder Report (&ldquo;TSR&rdquo;), a costly, duplicate disclosure document that demonstrated the SEC&rsquo;s insensitivity to industry costs when it required a TSR for each ETF (i.e., not permitting a single TSR for multiple ETFs), delivered by snail mail and in paper format.&nbsp; The consumer protection attitude has also greatly limited ETFs registered under the Investment Company Act of 1940 (&ldquo;1940 Act&rdquo;) to have exposure to Bitcoin, arguably the most revolutionary type of investment since the ETF. Notably, former Chairman Gensler without statutory authority has tried to expand the reach of its jurisdiction to regulating index providers by proposing a rule requiring registered investment advisers to elicit information from, and contractually impose certain conditions, on those companies.&nbsp; He also proposed the &ldquo;swing pricing&rdquo; rule, a prohibitively costly to implement that addressed an arguably phantom problem where certain shareholders might benefit over other shareholders in fund transactions.
Under the Trump Administration, we can expect a sharp departure from, if not abandonment of, these initiatives once its new Chairman, who is expected to be Paul Atkins, a former SEC commissioner, is in place. Consistent with the January 20th&nbsp;executive order, the SEC could stay all pending rules and repropose or abandon current rule proposals.&nbsp; Most notably, the SEC could roll back the names-rule to its present form prior to the compliance date of the overly burdensome and confusing modified Names Rule. In 2023, the SEC adopted amendments to the Name Rule that, when effective, will require ETFs with names that reference a thematic investment (e.g., &ldquo;clean energy&rdquo; or &ldquo;diversified&rdquo;) to invest at least 80% of their assets in those named specific areas. The SEC on January 8, 2025 issued an FAQ in an attempt to clarify these amendments.
2. Plethora of New Types of ETFs
The SEC&rsquo;s Division of Investment Management has kept a lid on new types of ETFs over the past four years administrative fiat or trickery.&nbsp; Under SEC rules, the SEC has 75 days after the filing of a new ETF to declare it effective.&nbsp; The Division has coerced ETF complexes to file successive &ldquo;BXTs&rdquo; to lengthen this period indefinitely.&nbsp; The unprecedent use of this mechanism has stifled the ETF industry, handicapping it from launching ETFs designed to address everchanging market and economic conditions and bringing to public investors financial products thriving in the booming private fund and private equity industry.
Given the Trump administration&rsquo;s and DOGE&rsquo;s priority for efficient governmental regulation, one would expect the SEC&rsquo;s use of BXTs to extend ETF launch deadlines and discourage certain types of ETFs to cease.&nbsp; One can expect the numerous ETF product ideas that have been building up at ETF complexes including creative uses of leverage, Bitcoin and private equity exposure and downside protection features to come to the surface in the form of new ETF filings at the SEC.&nbsp; As noted herein, this will require extra diligence by ETF boards to ensure shares of such ETFs are suitable to trade on public markets with special emphasis on the liquidity of the securities they hold and the ability to value them.
3. Enforcement&rsquo;s Shift from Dollars to Fraud
Each year during the Biden administration, the SEC&rsquo;s Division of Enforcement has trumpeted new record levels of civil fines and penalties.&nbsp; Inexplicably, these numbers in the SEC&rsquo;s mindset have become the yardstick for measuring the effectiveness of the entire agency. In its thirst for dollars (which by law it turns over to the Department of Treasury), it has engaged in unprecedented, aggressive practices such as initiating enforcement actions for violations of rules shortly after their adoption (e.g., investment adviser marketing rule), bringing enforcement actions in areas where the securities laws have not been formulated (e.g., off-channel communications) and regulating by enforcement (e.g., bringing cases for activities that the SEC believes it needs to police instead of adopting a rule governing such activities (e.g., numerous crypto cases).&nbsp; The enforcement pendulum likely will shift back to prioritizing fraud cases. In addition, the SEC&rsquo;s Office of Examinations should return to being a division that provides constructive guidance and warnings if necessary, after inspecting a given ETF complex instead of its present priority of finding violations that are fodder for enforcement actions.&nbsp; The recent judicial cases discussed in the next section will likely accelerate Enforcement returning to its roots and curb its appetite for dollars.
4. Recent Court Decisions Shaping the SEC&rsquo;s Agenda
The SEC (as well as other federal agencies in general) have lost major cases that will greatly impact how it administers the securities laws. The Supreme Court&rsquo;s decision in&nbsp;Loper Bright Enterprises v. Raimondo&nbsp;no longer requires courts to defer to the SEC&rsquo;s expertise in interpreting securities laws and rules, which should embolden the ETF industry to challenge future SEC rules viewed as overarching as well at temper SEC aggressiveness when rulemaking.&nbsp; Similarly, the decision by the 5th&nbsp;Circuit in&nbsp;SEC NAPFM v. SEC&nbsp;to reject SEC&rsquo;s comprehensive scheme to regulate private funds that was not based on statutory authority will be another reminder to the SEC to initiate rulemaking only if it has authority by statute to do so.&nbsp; The Supreme Court&rsquo;s decision in&nbsp;SEC v. Jarkesy&nbsp;will end the SEC&rsquo;s practice of using in-house tribunals to adjudicate fraud actions.&nbsp;This decision means that the SEC likely will be less inclined to bring a weak fraud case against an SEC provider, knowing that it no longer has home court advantage.
5. Effective ETF Board Governance Put to the Test
The board of directors (or trustees) of an ETF has significant responsibility to protect the ETF shareholder. By law, directors generally are responsible for the oversight of all of the operations of an ETF. In addition, under the 1940 Act, directors are assigned key responsibilities, such as negotiating and evaluating the reasonableness of advisory and other fees, selecting the fund&rsquo;s independent accountants, valuing certain securities held by the fund and managing certain operational conflicts.
Assuming the SEC loosens its reins, ETF managers will have the opportunity to push the product into new types of investments including crypto and private equity offerings, and strategies such as increased leveraged.&nbsp; Such investments undoubtedly increase the burden on boards to ensure that an ETF manager engaging in such investments and activities are meeting compliance requirements, not causing the shareholders to take undue risk and disclosing such investments and their risk with sufficient detail.&nbsp; For example, the board as noted is ultimately responsible for valuing an ETF&rsquo;s investments when it is overseeing the manager which acts as the ETF&rsquo;s valuation designee.&nbsp; Private equity investments present unique valuation challenges given the limited market for such investments, which will increase the board&rsquo;s burden to ensure proper valuation of such investments and policing conflicts of interest that arise in such valuation.
6. Tax Benefits of ETFs
Undoubtedly, the key attraction of the ETF product is its tax efficiency, an efficiency that its sister product, the mutual fund, lacks.&nbsp; An ETF&rsquo;s ability to engage in &ldquo;heartbeat&rdquo; trades to reduce or eliminate capital gains has led to significant conversions of mutual funds to ETFs and a surge of new ETFs in general.&nbsp; Rumors and whispers at the Treasury Department and on Capitol Hill that this benefit could be under attack to produce more tax revenue for the U.S. government sent mild chills through the industry. But concerns about the benefit being eliminated are likely overblown, given that it would take an act of Congress to amend the Internal Revenue Code to eliminate the tax benefit of the ETF product. Given the securities industry background of Scott Bessent, the Secretary of Treasury nominee, it is highly unlikely that the Treasury will push for such a bill, especially in light of a Republican controlled House and Senate and signed into law by President Trump.&nbsp; In fact, it is more likely that the Treasury Department through rule or otherwise will provide clarity on how ETFs may execute heartbeat trades without the risk that the IRS may collapse such trades into a single, taxable transaction.
7. Share Class Relief and Flexibility
Only one fund complex has exemptive relief that permits a registered investment company to have a mutual fund and ETF share class: Vanguard. A slew of similar exemptive applications from different fund complexes have been piling up on desks at the SEC.&nbsp; The SEC staff has been reluctant to allow others to join Vanguard primarily because of its concern that the ETF class shareholders due to the structural benefits of ETF might be subsidizing the mutual fund class shareholders. Since this concern could easily be addressed through conditions in the exemptive order and board oversight, expect the logjam to break, allowing more fund complexes to join Vanguard with multiple class funds and possibly other innovative share class structures. By breaking from an overly protected consumer protection mindset, the SEC can make ETFs more versatile, enabling fund managers to offer various investor options with a single fund, broadening ETFs appeal to both retail and institutional investors.
8. Capital Markets Left to Their Own Devices
ETF shares obviously trade on markets: Cboe, NASD and NYSE. Regulatory tinkering of the markets and their participants greatly impact the ETF product. Arguably, the centerpiece of former Chairman Gensler&rsquo;s term has been market structure reform. Among other actions, Gensler&rsquo;s SEC updated the&nbsp;National Market System, reduced the settlement cycle to one day and modified intermediary execution quality reporting requirements.&nbsp; Given the fact that most ETF shares currently trade with tight spreads and the create-redeem process led by Authorized Participants continue to perform almost flawlessly, it is likely that further market reform under new SEC leadership will not be a priority.&nbsp; Initiatives by the exchanges may face headwinds if the resources of the SEC&rsquo;s Division of Trading and Markets are cut.
9. Potential Approval of Bitcoin ETFs
Presently, the SEC, without statutory authority, bans ETFs from owning crypto currencies such as Bitcoin.&nbsp; Instead, ETFs must gain crypto exposure indirectly through Bitcoin trusts (e.g., iShares IBIT), crypto futures or other ways.&nbsp; Trump embraced digital assets during his campaign, even vowing to make the United States &ldquo;the crypto capital of the planet.&rdquo; At a major Bitcoin conference in July, 2024, Trump stated that &ldquo;we will have regulations, but from now on the rules will be written by people who love your industry, not hate your industry.&rdquo; Moreover, the two current Republican Commissioners have criticized the SEC&rsquo;s current restrictive approach to digital asset regulation. With this pro-crypto stance, ETF professionals should expect a friendlier SEC, potentially lifting the ban on ETFs owning Bitcoins and other digital assets. While such loosening will result in an ETF having the ability to have a significant portion of its assets directly invested in cryptocurrencies, do not expect pure crypto ETFs because 40 Act ETFs must invest at least 40% of their assets in securities and the issue of whether Bitcoin and other crypto currencies qualify as securities remains, and likely will remain, unresolved.
10. DOGE&rsquo;s Arrival Bringing Possible SEC Budget Cuts
During his campaign, President Trump emphasized reducing the size of the federal government. Elon Musk is leading the newly formed &ldquo;Department of Government Efficiency or DOGE,&rdquo; the goal of which is to reduce excessive regulations and cutting wasteful expenditure. Their reputations are on the line.&nbsp; Musk is very familiar with the SEC, having settled charges over his initial purchases in 2022 of shares of what was formerly called Twitter (now X) and on January 14, 2025, being charged by the SEC for alleging that he failed to timely file a beneficial ownership report with the SEC after acquiring beneficial ownership of more than 5% of the outstanding shares of Twitter in violation of the beneficial ownership reporting requirements under the Securities Exchange Act of 1934.&nbsp; On January 20, 2024, President Trump issued an executive order that&nbsp;freezes the hiring of federal civilian employees.&nbsp; With certain exceptions, this freeze applies to all executive departments and agencies regardless of their sources of operational and programmatic funding.
Would a dramatic cut in the SEC&rsquo;s budget translate into less ETF regulation and thus benefit ETF providers? Less regulation is good?&nbsp; Not necessarily.&nbsp; The ETF product itself was made possible only by SEC regulation. In fact, it may be the single greatest example of how the SEC, provided it has sufficient resources and visionary professionals, can allow innovation without sacrificing its mission to protect investors and ensure orderly markets.&nbsp; The ETF was only possible because the SEC staff had sufficient resources to review the concept and ultimately grant an exemptive application allowing it to be publicly offered to investors. &nbsp;Since then, the SEC staff through the power Congress granted it in Section 6(c) of the 1940 Act has the ability to, and has demonstrated its ability over the years to take actions through exemptive orders, rule-making and interpretive positions often at the ETF industry&rsquo;s request that have greatly benefited the ETF product. Through these actions, for example, the SEC has allowed the ETF product, initially an equity index fund, to blossom into a multitude of ETF flavors such as fixed-income ETFs, actively managed ETFs and non-transparent ETFs.&nbsp; And there is more work to done.&nbsp; For example, amending ETF custody rules allowing them to hold crypto currencies, increasing the pace of its core functions, such as approving post-effective amendments for new ETFs and likely processing exemptive applications for funds with ETF and mutual fund classes. The fact that the SEC&rsquo;s professionals are unionized may blunt DOGE&rsquo;s attempts to shrink the agency&rsquo;s headcount. Certainly, DOGE presents unchartered waters for the SEC and the ETF industry likely will benefit more if DOGE does not attempt to cut too deeply into the agency.
Conclusion
For the ETF industry, President Trump&rsquo;s return to office likely signals a broad deregulatory push, shifting away from the consumer protection and ESG-centric policies of the Biden Administration. These changes should open new opportunities for growth, especially in areas like Bitcoin ETFs and share class flexibility. But likely what the ETF industry would welcome most is a simple return to regulatory normalcy of tending to its knitting; i.e., carrying out its routine duties in an efficient and timely manner, which has not occurred in the past four years because its routine functions have been weighed down by well-intentioned but extremely burdensome consumer protection gloss on its basic functions.

Trump’s Executive Orders’ Impact on the ETF Industry

Services