SEC Proposes New ETF Rule

Author:Ms Erica Flores, W. John McGuire and Jeremy Esperon
Profession:Morgan Lewis

The new rule would permit ETFs to operate without the need to obtain individual exemptive orders from the US Securities and Exchange Commission.

At an open meeting1 on Thursday, June 28, the US Securities and Exchange Commission (SEC) voted unanimously to propose Rule 6c-11 (Rule) under the Investment Company Act of 1940 (1940 Act), as well as amendments to Forms N-1A, N-8B-2, and N-CEN.

As we continue to review the proposal, we wanted to share some of its highlights:


The Rule would only be available to ETFs organized as open-end funds. ETFs organized as unit investment trusts (UITs), ETFs structured as a share class of a multi-class fund, and leveraged or inverse ETFs would not be able to rely on the Rule and instead would continue to operate under their existing exemptive orders. Existing leveraged ETFs and ETFs organized as UITs would, however, be subject to the proposed amendments to Forms N-1A and N-8B-2, which are designed to provide investors with additional ETF-specific information, including information about costs specific to ETFs (collectively, Form Amendments).

Existing Exemptive Orders

The Rule would rescind exemptive relief previously granted to ETFs eligible to rely on the Rule.

Master-feeder funds. The Rule would rescind exemptive relief permitting ETFs to operate in a master-feeder structure. In so doing, the SEC cited a lack of industry interest in this structure as well as a concern that, where an ETF feeder fund transacts with a master fund on an in-kind basis and non-ETF feeder funds transact with the master fund on a cash basis, all feeder fund shareholders would bear costs associated with the cash transactions. The Rule would, however, grandfather existing master-feeder arrangements involving ETF feeder funds, but prevent the formation of new ones, by amending relevant exemptive orders. Funds of funds. The Rule would not rescind exemptive relief that permits ETF fund of funds arrangements. Index vs. Active

Although the Rule would provide exemptions for both index-based ETFs and actively managed ETFs, it would not establish different requirements based on whether an ETF's investment objective is to seek returns that correspond to the returns of an index.

Rationale. The SEC believes that index-based and actively managed ETFs that comply with the Rule's conditions function similarly with respect to operational matters, despite different investment objectives or strategies, and do not present...

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