SEC Proposes New Rule for ETFs

July 9, 2018

On June 28, 2018, the SEC proposed Rule 6c-11 (the “Rule”) under the Investment Company Act of 1940, as amended (the “1940 Act”), to modernize the regulatory framework for most exchange-traded funds (“ETFs”). The Rule – which would be available only to ETFs organized as open-end funds1 – would permit ETFs that satisfy certain conditions to operate without the expensive and time-consuming process of obtaining an exemptive order from the SEC.2 The SEC also proposed form amendments that would expand the disclosure obligations for all ETFs.

Conditions for Reliance on the Rule

The conditions for reliance on the Rule include the following:

  • Website Disclosures.  An ETF would be required to disclose on its website certain information,3including:
    • the ETF’s portfolio holdings;
    • the ETF’s NAV per share, market price and premium or discount (each as of the end of the prior business day);
    • historical information regarding premiums and discounts; and
    • a basket applicable to orders for the purchase or redemption of creation units to be priced based on the ETF’s next calculation of NAV.
  •  Policies and Procedures.  An ETF would be required to adopt and implement written policies and procedures that govern the construction of baskets and the process that will be used for the acceptance of baskets. If an ETF uses a “custom basket”4, then the ETF’s policies and procedures also must set forth detailed parameters for the construction and acceptance of custom baskets that are in the best interests of the ETF and its shareholders.
  • Recordkeeping.  An ETF would be required to maintain copies of all agreements with authorized participants and certain records relating to baskets exchanged with authorized participants.

Effect on Existing Exemptive Orders

The SEC proposed to rescind exemptive relief previously granted to ETFs that would be able to rely on the Rule. The SEC also proposed to rescind exemptive relief that permits ETFs to operate in a master-feeder structure. However, the SEC would grandfather existing master-feeder arrangements involving ETF feeder funds, but prevent the formation of new ones, by amending relevant exemptive orders.

Proposed Amendments to Registration Forms

The SEC proposed amendments to Form N-1A (the registration form used by open-end funds) and Form N-8B-2 (the registration form used by unit investment trusts) to require ETFs to disclose more useful, ETF-specific information that is intended for investors who purchase ETF shares on an exchange.

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The SEC has requested public comment on the proposals discussed above. Comments are due within 60 days after the proposals are published in the Federal Register.


1 The Rule would not be available to ETFs organized as unit investment trusts, ETFs structured as a share class of a multi-class fund or leveraged or inverse ETFs.

2 Under the current regulatory framework, in order to operate as an investment company under the 1940 Act, an ETF must receive exemptive relief from certain provisions of the 1940 Act.

3 In addition to the Rule’s website disclosure requirements, the proposed form amendments would require an ETF to disclose on its website (and in its prospectus) the median bid-ask spread for the ETF’s most recent fiscal year.

4 A “custom basket” is a basket that does not reflect a pro-rata representation of the ETF’s portfolio or that differs from other baskets used in transactions on the same business day.