SEC's Plan for ETF Trading Cost Disclosures Needs Work, ICI Says

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.”