Leveling the ETF Playing Field

Leveling the ETF Playing Field In September, the Securities and Exchange Commission (SEC) finalized its long awaited Exchange-Traded Fund (ETF) rules, which are designed to create a more level playing field for ETFs and streamline the authorization process. However, the new rules also come with operational challenges. Good-Bye Exemptive Relief The new rules eliminate the requirement for asset managers to obtain an exemption from certain provisions of the 1940 Act when launching an ETF. In some cases, this was an expensive and lengthy process and by removing the exemptive relief requirement, managers should be able to bring new ETF products to market more quickly. The streamlined authorization process also brings the US in line with Ireland, Luxembourg, and Hong Kong where launching an ETF is already similar to launching a traditional mutual fund. The streamlined authorization process does not apply to all ETFs. ETFs that are structured as Unit Investment Trusts or as share-classes of existing US mutual funds are not in scope. Additionally, ETFs employing more exotic strategies such as leveraged and inverse ETFs still require specific exemptive relief due to concerns that they may be too risky for retail investors. The new crop of semi-transparent ETFs also need to go through the traditional exemption process. Part of the rational for removing exemptive relief for standard ETFs is to allow the SEC to focus on the authorization of more complex ETFs. Markets and Securities Services “Over time the SEC’s thinking on ETFs evolved and some ETFs have ended up with permissions that are not available to others. Creating a streamlined and standardized approach to authorization should help eliminate this disparity.” Kelli O’Brien Director of Fund Administration, Citi