New SEC Rule 6c-11 will modernize ETF regulation

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On September 26, 2019, the Securities and Exchange Commission (SEC) ad it had adopted a new Rule 6c-11 under the Investment Companies Act 1940 (the “Investment Companies Act” or the “Act”). Rule 6c-11 will allow exchange-traded funds (ETFs) that meet certain conditions to operate without the expense and delay of obtaining an exemption order. The new rule takes effect 60 days after it is posted in the Federal Register. The new rule was proposed in June 2018 after an earlier version of the rule first proposed in 2009 was not adopted.

As part of the adoption of the new rule, the SEC also announced that one year after the effective date of the new rule, previous exemptions granted to ETFs to provide exemption related to incorporation and the operation of an ETF will be canceled. However, the SEC has indicated that parts of previous ETF exemption orders allowing funds to invest in ETFs beyond legal limits are not rescinded, and the SEC will continue to grant a similar exemption to newly created ETFs. on request to the SEC. Previous exemptions for Open-Ended Investment Trust (ITU) ETFs, Leveraged and Reverse ETFs, Equity Class ETFs and Non-Transparent ETFs will also not be rescinded as such ETFs cannot not rely on the new rule.

Conditions for using the new rule

Listing on a national securities exchange and issue and repurchase of shares. As is the case with ETFs currently operating under an exemption, ETFs based on the new rule must be listed on a national stock exchange and must issue and redeem only creation units to destination. and from authorized participants in exchange for baskets and a balance amount (if only).

However, the new rule will not impose a maximum or minimum creative unit size, nor will it impose requirements on the authoring unit size.

Baskets. The new rule requires an ETF to adopt and implement written policies and procedures that govern the construction of baskets and the process that will be used for the acceptance of baskets generally. In addition, the new rule allows ETFs that rely on the rule to use “custom baskets” if their basket policies and procedures: (i) define detailed parameters for building and accepting custom baskets which are in the best interests of the ETF and its shareholders, including the process of revising or deviating from these parameters; and (ii) specify the titles or roles of the employees of the ETF’s investment advisor who are required to review each personalized basket to ensure that it meets these parameters.

The ability to use custom baskets has tax and other advantages for ETFs. Previously, only certain issuers and promoters who had obtained an exemption before 2006 were able to use personalized baskets, unlike newer issuers and promoters. The rules of the game that only gave certain issuers and sponsors the ability to use custom baskets a competitive advantage over new issuers and sponsors have been leveled with the release of the new rule.

Disclosure of portfolio holdings and other disclosure on the website. The new rule requires an ETF to disclose the portfolio holdings that will form the basis for the next calculation of the ETF’s net asset value (NAV) per share on each business day before the opening of regular trading on the main stock exchange of the ETF. exchange traded fund. actions. On a daily basis, an ETF must disclose the following information on its website, free of charge, for each holding in its portfolio: (1) ticker symbol; (2) CUSIP or other identifier; (3) description of the operation; (4) the quantity of each security or other asset held; and (5) the percentage weight of the holdings in the portfolio.

The new rule also requires that the following information be publicly and prominently disclosed on an ETF’s website:

  • NAV per share, market price and premium or discount, each at the end of the previous business day;

  • A table and line graph showing the number of days ETF shares traded at a premium or discount during the calendar year and the most recent calendar quarters of the current year;

  • For ETFs with a premium or haircut greater than 2% for more than seven consecutive trading days, the disclosure that the premium or haircut was greater than 2%, along with a discussion of factors reasonably suspected to have contributed significantly to the premium or discount. This information must remain on a website for at least one year from the first day of its publication; and

  • Median offer spread over the last 30 calendar days, calculated from the best national offer and the best national offer.

Marketing and Intraday Indicative Value (IVI). Unlike the existing exemption for ETFs, the new rule does not require an ETF to: (i) identify in its sales literature as an ETF that does not sell or redeem individual stocks, or (ii ) explains that investors can buy or sell individual equity ETFs through a broker through a national stock exchange.

The new rule also does not require ETFs to release an intraday estimate of their net asset value per share (an “intraday indicative value” or “IIV”) as a condition for resorting to the rule.

Record keeping

The new rule requires ETFs to keep and retain copies of all written agreements between an authorized participant and the ETF (or any of the ETF’s service providers) that allow the authorized participant to buy or redeem creation shares.

The rule also requires an ETF to keep records for at least five years, showing the following information for each basket traded with an authorized participant: (i) ticker symbol, CUSIP or other identifier, description of the participation, quantity of each participation , and weight in percentage of each participation making up the basket exchanged for creation units; (ii) where applicable, an identification of the basket as a “personalized basket” and a record that the personalized basket complies with ETF personalized basket policies and procedures; (iii) cash balances (if applicable); and (iv) the identity of the authorized participant carrying out the transaction.

Form changes

Under the new rule, the SEC also adopts certain information changes corresponding to Forms N-1A, N-8B-2 and N-CEN, as well as technical changes to Form N-CSR, Form N-1A, form N-8B-2, form N-PORT and regulation SX. The corresponding changes to forms N-1A, N-8B-2 and N-CEN will come into force one year after the date of entry into force of the new rule. All registration statements, post-effective changes and reports on such forms filed on or after that date must comply with the changes.

© 2021 Greenberg Traurig, LLP. All rights reserved. Revue nationale de droit, volume IX, number 275



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