Securities Law & Corporate Counsel Blog

While exchange-traded funds (ETFs), a hybrid investment product, have been a staple of modern investing since the early 90s, the Securities and Exchange Commission (SEC) has been slow to create a proper regulatory framework for this $3.4 trillion market. Now, however, the SEC has finally decided to create such a framework.

Though you can read the full press release here, essentially, the SEC has proposed Rule 6c-11 (which is part of the Investment Company Act of 1940), which would bypass the current inefficient process of applying for an SEC exemptive order (of which there are hundreds to date for ETFs). Exemptive relief was never truly a viable answer to ETFs and placed a burden both on firms and on the SEC itself. Some found that the exemptive relief could be streamlined, modernized, and made more efficient toward regulatory framework. These subsequent changes will surely be welcomed by both the SEC and firms alike.

Most, but not All, ETFs Affected

This is a big change, one that firms will want to watch closely to determine if ETFs will now become a more viable, attractive product. This rule will also free up SEC resources to allow the SEC to focus on some of the newer, more cutting-edge products being developed in the modern age of cryptocurrency and blockchain.

Interestingly, though the changes are all common sense, only so-called "normal" or "plain" ETFs will be covered by the proposed rule, while ETFs that have been organized into UITs (unit investment trusts) will likely not be included. Any ETFs that fall under the purview of the new rule will no longer need their exemptive order, so that order will subsequently be rescinded under the new rule.

Proposed Rule 6c-11 Requires Amendments to Form N-1A

To bring ETFs in line with existing products, some basic requirements common to many products on the market today would be applied. For example, Form N-1A would be amended to increase the amount of disclosures required concerning the cost of investing. Website disclosures for ETFs would also be significantly increased, and an interactive calculator would be required that would allow investors to calculate those costs for themselves.

Website disclosures, and disclosures in general, have long been a focus of SEC attention, and with protection of retail investors a top priority for the SEC in 2018, firms that are not maintaining compliance with respect to proper disclosures could soon find themselves in the crosshairs of regulators. The SEC proposed amendments overall are requiring ETFs to disclose more ETF-specific and useful information, which has created further compliance to open-end funds for investors who purchase ETF shares on an exchange,

Contact Jacko Law Group for Help With Any Proposed Rule Changes

Our knowledgeable team can help you with any and all regulatory and compliance issues, especially proper website disclosures. Contact us to learn more about how we help your firm maintain compliance, so you can focus on your business.