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Portfolio > ETFs

SEC Issues Long-Awaited Final ETF Rule

By Melanie Waddell

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The Securities and Exchange Commission said Thursday that it adopted a new rule to modernize the regulation of exchange-traded funds by establishing a clear and consistent framework for the vast majority of ETFs operating today — eliminating the need for most of them to seek exemptive relief before coming to market.

Adoption of the long-awaited rule will facilitate greater competition and innovation in the ETF marketplace, leading to more choice for investors, the SEC says.

Dalia Blass, head of the SEC’s investment management division, said in March that the division planned to finalize rules on ETFs and funds of funds this year.

The commission also voted Thursday to issue an exemptive order that further harmonizes related relief for broker-dealers.

“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,” said SEC Chairman Jay Clayton, in a Thursday statement.

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 $3.3 trillion in total net assets, the agency reports.

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, the agency explained. ETFs organized as unit investment trust, leveraged or inverse ETFs, ETFs structured as a share class of a multi-class fund and nontransparent ETFs will not be able to rely on the rule.

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.

— Related on ThinkAdvisor:

Melanie Waddell

@Think_MelanieW

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