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New SEC Rule on ETFs Is a Win-Win: Analysts

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Get ready for more and quicker ETF launches as a result of a new rule from the Securities and Exchange Commission on ETF approval.

Under Rule 6c-11, asset managers will no longer be required to file for exemptive relief under the Investment Company Act of 1940 for each new ETF application, explaining why they were different from mutual funds. They will instead be able to bring new ETFs to market under a single rule so long as the funds satisfy conditions set by the SEC that are intended to promote investor protection.

The rule will take effect 60 days after publication in the Federal Register.

(Related: SEC Issues Long-Awaited Final ETF Rule)

“We’re going to see more ETF launches,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA about Rule 6c-11, in his analysis. “Small asset managers will expand their product lineups and new entrants will seek to join the ETF industry, particularly with thematic offerings.”

The new SEC ETF rule essentially acknowledges ETFs as an investment vehicle separate from mutual funds.

“The entire ETF industry has lived by exception for 26 years,” said Dave Nadig, managing director of ”Now it will live by rule. This just cleans up the status quo and levels the playing field rather than resetting the rules of the game.”

The rule doesn’t just equalize regulations between mutual funds and ETFs but between index and active funds, which have been treated differently by the SEC under prior exemptive orders.

It also provides greater flexibility for the construction of in-kind baskets of securities and assets that ETFs generally require in connection with the purchase and redemption of large aggregations of shares (creation units), which should enhance liquidity, according to analysts.

Custom baskets can be used if the ETF “adopts written policies and procedures” detailing the “parameters for construction and acceptance of custom baskets that are in the best interest of the ETFs and its shareholders,” according to the SEC. The SEC had stopped providing exemptive relief for ETFs using custom baskets in 2012, according to Rosenbluth.

The new ETF rule includes multiple requirements that will benefit investors:

  • It requires that ETFs publish their full portfolios daily on the ETF’s website, which had not been required of ETFs whose index providers were not affiliated with the ETF sponsor
  • It requires ETFs to disclose on their website historical information on premiums and discounts to net asset values and bid-ask spreads

The rule does not apply to nontransparent actively traded ETFs or leveraged or inverse ETFs.

Overall Rule 6c-11 is receiving high marks from ETF analysts who call it a win-win for asset managers and investors.

“The rule will provide greater transparency about the trading costs investors should expect with individual ETFs, should allow asset managers to work more closely with institutional investors to support liquidity of these ETFs and provide guidelines for asset managers seeking to launch new products in a timely manner, which should drive price competition,” wrote Rosenbluth.

It was “long overdue,” said Ben Johnson, director of global exchange-traded fund research at Morningstar. “The SEC has finally assembled an eggshell around a 26-year-old chicken.”


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