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

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.”