Exchange-Traded Funds and Investment Company Liquidity Disclosures Addressed in Recent SEC Actions

Author: Marcy Kempf

A busy day for the Securities and Exchange Commission (SEC). The open meeting held on June 28, 2018, resulted in votes on several final rules and rule proposals that had been noted as priorities and publicly discussed in recent speeches from SEC staff. Among other things, two significant items — exchange-traded fund (ETF) exemptive orders and amendments to Rule 22e-4, better known as the Liquidity Rule — were both impacted by the day’s work.

Potential Relief from Exemptive Order Process
In a long-awaited move, the SEC voted on Proposed Rule 6c-11 that would provide a workaround from the burdensome exemptive order process currently in place for new ETFs coming to market.

Under the proposed rule, ETFs would be organized as open-end funds under the Investment Company Act of 1940, and restrictions on ETFs organized as unit investments trusts or those using leverage would apply. However, upon satisfaction of certain conditions the proposed rule would lower the barrier to entry for ETF sponsors as well as provide new information to ETF investors.

The conditions noted within the proposed rule would require ETFs to provide daily portfolio transparency on their websites, as well as other information such as historical data regarding premiums, discount and bid-ask spreads. In addition, for those ETFs utilizing a custom basket, the ETF would be required to adopt written policies and procedures outlining specific parameters for their use. Other disclosures and recordkeeping requirements are also outlined in the release, including potential revisions to Form N-1A to further promote consistency between the current requirements for open-end funds and ETFs relying on the proposed rule.

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