Mr. Brent J. Fields
Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: Exchange-Traded Funds
File No. S7-15-18
Dear Mr. Fields:
The ETF Committee of the Asset Management Group (the “AMG”) of the Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to provide comments to the United States Securities and Exchange Commission (the “Commission”) on the Commission’s proposed new Rule 6c-11 under the Investment Company Act of 1940, as amended (the “Investment Company Act” or the “1940 Act”), that would permit exchange-traded funds (“ETFs”) that satisfy certain conditions to operate without having to obtain an exemptive order (the “Proposed Rule”). In addition, AMG is also providing comments on the Commission’s proposal to rescind certain exemptive orders that have been granted to ETFs and their sponsors and certain proposed form amendments relating to ETFs (together with the Proposed Rule, the “Proposal”).2
AMG strongly supports the object of the Proposal – to permit ETFs to operate without the expense and delay of obtaining an exemptive order and to level the playing field for new and existing ETF sponsors. To assist the Commission in finalizing the Proposed Rule, AMG sets forth below a number of specific comments and suggestions regarding the Proposal.
A. Background
Overview of the U.S. ETF Industry.
ETFs provide a number of important benefits to investors including low fees, tax efficiency and intraday liquidity. Since the first U.S. ETF was listed in 1993, the U.S. ETF industry has grown and matured rapidly. Assets in U.S. ETFs have grown to over $3.6 trillion, and the number of funds has reached over 2,000.3 Yet the phenomenal growth experienced by the U.S. ETF industry has occurred against the backdrop of a complex, inflexible and often inefficient regulatory system.
Current U.S. ETF Regulation.
ETFs do not fit neatly within the U.S. securities laws. While the 1940 Act explicitly authorizes open-end investment companies (commonly referred to as mutual funds), closed-end investment companies, and unit investment trusts (“UITs”), there currently is no provision made for ETFs. ETFs combine certain of the characteristics of open-end funds (continuous share offering, net asset value struck at the close of trading) and closed-end funds (exchange listing, shares trade on the secondary market at prevailing market prices). Absent a 1940 Act framework, ETFs are forced to operate under modified and ad hoc regulations and laws written for traditional open-end mutual funds, which operate differently.
In order to create a 1940 Act-registered ETF, the ETF sponsor must first apply to the Commission’s Division of Investment Management (“IM”) to obtain a series of exemptions from the 1940 Act (“Exemptive Relief”).4 Exemptive Relief can be costly and time-consuming to obtain, and the inefficient process acts as a high barrier to entry that has hampered innovation for managers that are looking to sponsor ETFs and bring new products to market.5 In addition to obtaining Exemptive Relief, the ETF sponsor must file a registration statement to register the shares of the ETF.6
The final regulatory hurdle to list shares of an ETF on an exchange is to obtain relief from the Commission’s Division of Trading and Markets (“T&M”). To list its shares, an ETF must either meet the “generic” listing standards for one of the primary listing exchanges for ETF shares – NYSE Arca, NASDAQ Stock Market or Cboe BZX Exchange7 – or if the ETF is unable to meet the generic listing standards, the listing exchange must file a rule change proposal with T&M, which may take between 30 and 240 days to be considered.8 Finally, depending on whether certain “class” relief from various provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is available, ETF sponsors may have to apply to the T&M to obtain “no-action” relief with respect to a number of other issues under the U.S. securities laws given the hybrid nature of ETFs.9
2018 ETF Rule Proposal.
On June 28, 2018, the Commission unanimously voted to propose new Rule 6c-11 under the 1940 Act, which, if adopted, would permit ETFs that satisfy certain conditions to organize and operate without the expense and delay of obtaining an exemptive order from the Commission.10 The Proposed Rule seeks to “create a consistent, transparent, and efficient regulatory framework for ETFs and to facilitate greater competition and innovation among ETFs.”11 As the Commission noted in the Proposing Release, the Proposal is based on the Commission’s experience in regulating ETFs for more than 25 years, and has been informed by the feedback received in response to the 2008 ETF Rule Proposal and the 2015 ETP Release.12 The Proposed Rule would simplify the regulatory framework and remove historical distinctions between actively managed and index-based ETFs. The Proposed Rule also would rescind most of the varying provisions of prior Exemptive Relief that has been granted over time, and instead would be subject to a consistent regulatory framework.13 In addition, the Proposed Rule would promote the efficient operation of the arbitrage mechanism that supports an ETF’s shares trading at a market price approximating the ETF’s net asset value per share (“NAV”). Furthermore, creating an efficient regulatory framework for ETFs would allow Commission staff and industry participants to focus the exemptive order process on products that do not fall within the scope of the Proposed Rule. The proposals set forth in the Proposing Release would:
• Codify much of the existing Exemptive Relief, permitting ETFs organized as open-end funds, with some exceptions, to operate without obtaining individual Exemptive Relief from
the Commission.14
• Rescind most elements of the Exemptive Relief previously granted to those ETFs able to rely on the Proposed Rule.
• Permit an ETF relying on the Proposed Rule to use custom creation and redemption baskets that do not reflect a pro rata representation of the ETF’s portfolio and/or that differ from other baskets used in creation or redemption transactions on the same business day.
• Require ETFs relying on the Proposed Rule to disclose certain information on their websites, including: (i) portfolio holdings that will form the basis of the ETF’s next NAV calculation; (ii) historical information regarding the ETF’s NAV, premiums and discounts, and bid-ask spreads; and (iii) information regarding a basket of securities that the ETF would accept or provide in connection with a creation or redemption, updated at the beginning of each business day.
• Amend Form N-1A and Form N-8B-2 to require disclosure by all ETFs (not just ETFs eligible to rely on the Proposed Rule) of ETF-specific information relevant to investors who purchase and sell ETF shares in the secondary market.
Since the Proposed Rule codifies much of the standard 1940 Act Exemptive Relief ETFs rely on presently, ETFs relying on the Proposed Rule should be able to operate under similar conditions and in a manner similar to how they currently operate. The Proposal addresses all of the current Exemptive Relief except the relief from Section 12(d)(1), which would not be rescinded under the Proposal.