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Jim Nash, Foreside

Call your compliance officer now, says Foreside director, as the ETF rule settles in place


Jim Nash (pictured), director at compliance consulting and outsourced broker/dealer firm Foreside, is urging ETF issuers to call their compliance consultants now as the December 2020 deadline looms for compliance with the ETF rule, rule 6c-11.

Nash believes that as ETF launches have increased steadily over the past few years, this year could be the best year for listings yet, with the new ETF rule expected to pave the way for that. 

The rule provides a common regulatory framework, helping to increase consistency with requirements, and will remove the barrier to entry for new ETF entrants that were previously deterred by the timely and costly exemptive order process. This will give more choices to investors, empowering them with more data around liquidity.

Foreside directly helps firms launch ETFs, including facilitating authorised participant (AP) agreements, offering ETF consulting,  providing fund compliance and financial officers and acting as legal underwriter for ETFs.

“It’s an exciting time for ETF issuers,” Nash says. Foreside acts as a distributor and compliance consultant to mutual funds, ETFs and registered closed-end funds and in addition provides front office and compliance consulting services for the fund industry.

“Prior to the rule, and how things were for the last 20 to almost 30 years, ETFs that wanted to launch and sell shares to the public didn’t fit neatly into the 1940 act requirement so they had to apply for special exemptive relief from the SEC in order to operate, Nash explains.

This could be a lengthy and expensive process, with some 300 exemptive orders passed by the SEC over the years, many with different terms and conditions, depending on the timing or the approach of different law firms.

In an effort to reduce the uncertainty, the SEC first proposed an ETF rule in 2008, dropped that and then proposed a second in June 2018, which was adopted in December 2019.

“It’s effective now,” Nash explains. “So now, instead of going through the exemptive order process, issuers can just go ahead and register with the SEC and skip that onerous first step.”

While predictions abounded last December that the ETF industry would enjoy a massive harvest of launches, the real world got in the way. There were initial adopters launching in early January until the markets were hit by extreme volatility. And then the pandemic and the limitations that imposed had an effect.

“Current events stifled the rate of adoption,” Nash says. “But anecdotally there were a lot of issuers waiting to get into the ring and get into the game.”

The rule applies to transparent passively and actively managed funds and certain types of funds were exempted, those structured as Unit Investment Trusts , those that use leverage or inverse strategies, and those with more exotic structures such as share class ETFs, master/feeder ETFs, and newly adopted non-transparent or semi-transparent active ETFs.

“The funds that fall under the ETF rule may be vanilla in structure but it gives smaller creative issuers freedom to focus their energies on setting up their innovative strategy products and not worry about waiting for or funding that exemptive order process so hopefully we can see a busy end of the year,” Nash says.

All ETFs with exemptive orders covered by the rule will now have to comply with the ETF rule in the US, as the existing relief is rescinded. 

“Call your compliance consultant right away. It is daunting for the market as compliance with the ETF rule comes right on the heels of compliance with the liquidity rule and dealing with the pandemic, but take comfort that the way the rules and requirements are written track along with the traditional exemptive order conditions,” Nash says. “There are policies and procedures you need to adopt and other operational requirements but there is nothing that should be too out of left field for existing issuers.”

Foreside recently hosted a webinar and took a poll of around 100 ETF professionals that revealed that 60/40 were ready against not ready.

Beyond that, Nash predicts that there will be a lot more entrants in the next year or so and says that it will be interesting to see what types of ETFs start to come through. ESG and funds that construct their portfolios according to non-traditional criteria continues to feature heavily, and he is interested to see what happens in the buffer ETF space, where funds utilise options to create a defined outcome.

This last strategy in ETF form is predicted by some to be set to take out the annuity market. “They are certainly going to try,” Nash says.

“It’s been an interesting year and the ETF industry seems healthy, but it has been a strange year.”

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