SEC to Consider ETF Rule Proposal at June 28, 2018 Open Meeting
Date: June 22, 2018
On June 20, 2018, the Securities and Exchange Commission (SEC) announced it will hold an open meeting on Thursday, June 28, 2018, where it is expected to propose the long-awaited “ETF rule.” Proposed Rule 6c-11 under the Investment Company Act of 1940 (1940 Act) would allow new exchange-traded fund (ETF) advisers to enter into the ETF business without having to go through the lengthy exemptive order process. What remains to be seen is whether Rule 6c-11 will contain additional regulations unrelated to the exemptive process.
Currently, an adviser launching its first ETF must file an application to obtain exemptive relief from certain provisions under the 1940 Act prior to launch. SEC review of these applications typically takes at least four months, depending on the novelty of the product. New ETF advisers often file the applications concurrently with new registration statements, which generally have a shorter review period.
The SEC proposed Rule 6c-11 to permit the operation of passive and active ETFs without an exemptive order on March 11, 2008. That release also proposed Rule 12d1-4, which would have provided an exemption (similar to the exemption from Section 12(d)(1) that ETFs typically receive in exemptive orders) for other investment companies to invest in ETFs over Section 12(d)(1)(A) limitations. These rules were never adopted.
Among the many questions expected to be answered next week are whether a rule similar to Rule 12d1-4 will also be proposed, or whether the Rule 6c-11 proposal will have a similar scope. Other questions include whether the creation basket of an index ETF will have to exactly match the component securities of the index; whether the use of “ETF” in the name of a fund will be limited to certain types of exchange-traded vehicles; and how so-called “bespoke” index ETFs will be treated under the rule.
If proposed Rule 6c-11 is adopted, an adviser launching its first ETF that can rely on the rule will save the incremental time and expense associated with filing exemptive applications and responding to SEC comments on those applications.
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