The SEC adopted a new rule and form amendments designed to modernize the regulation of exchange-traded funds ("ETFs") by effectively codifying existing Investment Company Act exemptive relief.

Specifically, the SEC:

  • adopted Investment Company Act Rule 6c-11, which will provide qualifying ETFs with the ability to operate without having to obtain individual exemptive orders from the SEC;

  • revoked prior exemptive relief given to qualifying ETFs and required that these ETFs comply with the conditions of Rule 6c-11;

  • amended Forms N-1A and N-8B-2 to provide additional information on ETF trading and costs; and

  • modified Form N-CEN to collect information upon which the ETFs may rely under Rule 6c-11.

ETFs that are not within the scope of Rule 6c-11 and, therefore, must continue to rely on exemptive orders are (i) ETFs that are organized as unit investment trusts, (ii) leveraged or inverse ETFs, (iii) ETFs that are structured as a share class of a multi-class fund and (iv) non-transparent ETFs.

In order to rely on the exemption, a qualifying ETF will be required to:

  • provide daily portfolio transparency on its website;

  • adopt and comply with policies and procedures regarding the construction of baskets;

  • adhere to certain recordkeeping requirements; and

  • disclose certain trading information - such as premiums, discounts and bid-ask spread information - to help investors understand (i) the costs associated with ETF investing and (ii) the efficiency of an ETF's arbitrage process.

The new rule does not distinguish between index ETFs and ETFs that are actively managed.

The SEC also stated that qualifying ETFs would be treated, for purposes of other provisions of the securities laws and rules, as "open-end funds," and the shares issued by ETFs would be treated as "redeemable" securities. As an example, ETFs will be able to qualify for the exemption that SEA Rule 11d1-2 provides for open-end, SEC-registered investment companies.

The new rule and form amendments will become effective 60 days after their publication in the Federal Register. In addition, the SEC noted there will be a transition period for compliance with the form amendments lasting one year.

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