While the Investment Company Institute is gung-ho about the Securities and Exchange Commission’s proposed ETF rule, the mutual fund trade group says the plan needs modifications — specifically to measures intended to help illustrate trading costs.
In a Friday comment letter to the agency on its long-awaited ETF rule, ICI recommended that the SEC consider providing alternative disclosures to help investors understand ETF trading costs and urged the commission to consider ways to streamline the regulation of ETFs under both the Securities Exchange Act of 1934 and the Investment Company Act of 1940.
The SEC proposed on June 28 a plan to allow many ETFs to come to market without first obtaining exemptive relief from the Investment Company Act of 1940 — a plan that updates and attempts to streamline 26 years of ETF approvals by the agency through hundreds of exemptive orders.
The comment period ends on Oct. 1.
“ETFs have been one of the most successful, popular financial innovations in recent years. By advancing this rule, the SEC sends a signal that ETFs are an investment product that deserves its own uniform regulation under the Investment Company Act of 1940,” Susan Olson, ICI’s general counsel, stated in the comment letter. “Once in place, this new rule and related disclosures will help provide an updated framework for this growing industry and enhance the ETF investor experience.”
The rule does not distinguish between index-based ETFs and actively managed ETFs, Olson notes.
As ICI also notes, the SEC also proposes certain disclosure amendments intended to provide investors who purchase and sell ETF shares in the secondary market with additional information to help them understand ETF trading costs.
Olson told the agency, however, that ICI has “serious concerns” with the plans’ proposed new section that would add a series of question and answers requiring disclosure of certain ETF trading information and trading costs.
“Although we support narrative disclosure that would highlight the transaction fees and costs for ETFs that are not reflected in the fee table, we do not believe ETFs should be required to calculate and disclose their bid-ask spread costs,” Olson stated.
“Unlike an ETF’s other quantitative disclosure responsibilities, an ETF does not control bid-ask spread costs and must either purchase market data to calculate it or rely on third-party vendors for this information.”
To demonstrate how costs attributable to bid-ask spreads can affect an investor’s total costs of investing in an ETF, ICI recommends the commission “add a hypothetical example using standard inputs, like the current prospectus fee example,” Olson added.
ETFs should also not be required to add an interactive calculator on their websites to provide investors with a tool relating to the total costs of trading ETFs in the secondary market.
“Not only is historical bid-ask spread data not necessarily predictive of an investor’s future spread costs, the proposed bid-ask spread disclosure and the interactive calculator add additional vendor and licensing fees to a growing list of SEC-mandated disclosures for registered funds,” Olson said.
If the commission decides to move ahead with an interactive calculator for investors, ICI recommends the agency “utilize the advanced market metrics available on the SEC’s website. This way there would be a single data source and methodology for the calculator allowing investors to assess these costs in one place and in a comparable manner,” Olson stated.
Streamlining ETF Regulation
ICI, Olson said, believes that “automatic relief” for ETFs from certain Securities Exchange Act rules “could be warranted,” and recommended the SEC consider ways to streamline the regulation of ETFs under both the Investment Company Act and the Securities Exchange Act.
“Currently, ETFs often must satisfy multiple and sometimes conflicting requirements from different divisions within the SEC,” Olson wrote.
“An ETF must comply with the initial and continued listing requirements of the exchange upon which it will list its shares. If a new ETF cannot meet an exchange’s pre-approved ‘generic’ listing or continued listing standards, even in an immaterial manner, then the exchange must submit an individual proposed rule change to the [SEC] Division of Trading and Markets to obtain approval to list and trade that product.”
Under Securities Exchange Act Rule 19b-4, “exchanges have no discretion to offer issuers any waiver from the initial or continuing listing standards,” Olson noted. “Unfortunately, the current process for submitting and obtaining approval of a proposed rule change can slow the launch of new ETFs by more than a year (thereby depriving investors of new investing opportunities), creates different rules for similar products depending on the approval vintage, and is an inefficient use of the SEC’s resources.”