Law Firm Memos Dissect ETF Rule Proposal, Note Areas for Additional Guidance

Attorneys from K&L Gates and Stradley Ronon provide in-depth perspectives on the SEC’s recent rule proposal on exchange-traded funds, reviewing the rule’s requirements and how it will affect the current ETF ecosystem. Stradley Ronon lawyers discuss the use of custom baskets and note that the ability to use custom baskets “would represent flexibility that was not generally available under most prior ETF exemptive orders.” They add that the use of custom baskets could result in better performance and more efficient transactions. K&L Gates lawyers observe that while the proposal is a welcome development, the SEC can expect “significant comments from ETF issuers and service providers on several aspects of the proposed rule.” Comments may zero in on the costs of establishing an interactive website bid-ask spread calculator; expansion of the proposed relief to permit certain entities to act as authorized participants for affiliated ETFs; and guidance for ETFs existing under current exemptive orders. They write that additional guidance may be necessary for ETFs relying on current exemptive orders that may not meet certain requirements of the proposed rule.  “For example, is an ETF that currently relies on its existing order that permits basket flexibility, without the promulgation of custom basket policies and procedures subject to board oversight, one that “would be permitted to rely” on the proposed rule?”