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SEC adopts new rule on ETFs


The US regulatory body the SEC has announced that it has voted to adopt a new rule and form amendments that are designed to modernise the regulation of ETFs, ‘by establishing a clear and consistent framework for the vast majority of ETFs operating today’. 

The SEC writes that the adoption will facilitate greater competition and innovation in the ETF marketplace, leading to more choice for investors.  “It also will allow ETFs to come to market more quickly without the time or expense of applying for individual exemptive relief.”

In addition, the Commission voted to issue an exemptive order that further harmonises related relief for broker-dealers.
“Since ETFs were first developed over 27 years ago, they have provided investors with a number of benefits, including access to a wide array of investment strategies, in many cases at a low cost,” says SEC Chairman Jay Clayton. “As the ETF industry continues to grow in size and importance, particularly to Main Street investors, it is important to have a consistent, transparent, and efficient regulatory framework that eliminates regulatory hurdles while maintaining appropriate investor protections.”
The back story is that ETFs are currently hybrid investment products not originally allowed under the US securities laws.  Their shares trade on an exchange like a stock or closed-end fund, but they also allow identified large institutions to transact directly with the fund.
 Since 1992, the Commission has issued more than 300 exemptive orders allowing ETFs to operate under the Investment Company Act.  ETFs have grown substantially in that period, and today there are approximately 2,000 ETFs with over USD3.3 trillion in total net assets.  Investors use ETFs for a variety of purposes, including core components of long-term investment portfolios, investment of temporary cash holdings, and for hedging portfolios.
ETFs relying on the rule and related exemptive order will have to comply with certain conditions designed to protect investors, including conditions regarding transparency and disclosure.  To help create a consistent ETF regulatory framework, one year after the effective date of the rule, the Commission is rescinding exemptive relief previously granted to certain ETFs, including those that will be permitted to operate in reliance on the rule.  The rule and form amendments will be effective 60 days after publication in the Federal Register, but there will be a one-year transition period for compliance with the form amendments.

Denise Krisko (pictured), president & Co-Founder of Vident Investment Advisory, recently commented that the US industry was waiting for news from the SEC.

Emil Tarazi, CEO of ETF Logic, says: “With the passing of this rule, ETF issuers will be faced with some new challenges in order to provide better transparency and increased disclosures to investors. This is a huge step forward for the industry, however, because it will require issuers to provide better education around ETFs and potentially help drive further adoption. ETFLogic has actually been preparing for the transparency and disclosure requirements around this rule for a while now, and we have a unique suite of tools which will help issuers comply with these additional requirements.”


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