SEC Proposes Easing of ETF Regulations

The Securities and Exchange Commission (SEC) has proposed two new rules under the Investment Company Act to allow exchange-traded funds (ETFs) to operate without first getting SEC exemptive orders.

An SEC news release said the commission also proposed amendments to disclosure Form N-1A to include additional information for ETF investors who purchase shares in the secondary markets.

“The proposed rules would increase investor choice by eliminating a barrier to entry for new participants in this fast-growing market, while preserving investor protections,” said Andrew J. Donohue, Director of the SEC’s Division of Investment Management, in the news release. “Permitting most ETFs to come directly to market without the cost and delay of obtaining an exemptive order would also allow staff to focus on more novel and difficult requests.”

Specifically, the commission released:

  • Proposed Rule 6c-11, which would provide several exemptions from the act to permit ETFs to form and operate without the need to obtain individual exemptive relief from the commission. The rule would codify most of the exemptions previously granted by the commission to index-based ETFs and, pursuant to several recently issued exemptive orders, to fully transparent actively managed ETFs.
  • Proposed Rule 12d1-4, which would allow investment companies to make larger investments in ETFs than currently permitted, which limits one investment company to acquiring no more than 3% of another investment company’s shares. The exemptions in the proposed rule would be subject to several conditions designed to address the historical abuses associated with “pyramiding” schemes that often occurred with fund investment in other funds.
  • Amendments to Form N-1A, which open-end funds use to register and offer their securities under the Securities Act of 1933, would accommodate the use of the form by ETFs. The proposed amendments are designed to provide key information to investors who purchase ETF shares in secondary market transactions, where most ETF investors purchase their shares.

The comment period for the proposal will end 60 days from the date of publication of the proposed rule in the Federal Register.