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SEC Adopts Exchange-Traded Funds Rule

SEC Commissioners voted unanimously to adopt a new rule and form amendments to modernize the regulation of ETFs.  The adoption will facilitate greater competition and innovation in the ETF marketplace, leading to more choice for investors, according to the SEC’s news release.  The rule and amendments do not contain new requirements for fund directors, however with respect to the creation of custom baskets, the SEC wrote that an ETF’s basket policies and procedures should be covered by the ETF’s compliance program and other requirements under rule 38a-1 and thus subject to board oversight. “We believe that the ETF’s board of directors’ oversight of the ETF’s compliance policies and procedures, as well as their general oversight of the ETF, would provide an additional layer of protection for an ETF’s use of custom baskets,” the SEC wrote in the adopting release. According to the adopting release, the new rule will exempt ETFs organized as open-end funds from certain provisions of the 1940 Act and other rules and permit an ETF to: (i) redeem shares only in creation unit aggregations; (ii) permit ETF shares to be purchased and sold at market prices, rather than NAV; (iii) engage in in-kind transactions with certain affiliates; and (iv) in certain limited circumstances, pay authorized participants the proceeds from the redemption of shares in more than seven days. The rule applies to both index and transparent actively-managed ETFs. In addition, the SEC issued an exemptive order that further harmonizes related relief for broker-dealers. ETFs relying on the rule and related exemptive order will have to comply with certain conditions regarding transparency and disclosure. One year after the effective date of the rule, the Commission is rescinding exemptive relief previously granted to certain ETFs, including those that will be permitted to operate in reliance on the rule.  The exemptive relief granted to UIT ETFs, leveraged/inverse ETFs, share class ETFs, and non-transparent ETFs will remain in effect, as they are outside the scope of the rule. In addition, the SEC is retaining the exemptive relief allowing ETFs to enter into fund of funds arrangements. The rule and form amendments will be effective 60 days after publication in the Federal Register, but there will be a one-year transition period for compliance with the form amendments. Meanwhile, Invesco is seeking SEC approval for its own line of actively managed non-transparent ETFs patterned after Precidian Investments’ non-transparent active ETF framework, according to various media reports.

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