SEC poised to advance rule that streamlines ETF approval process

The fast-growing $3.6 trillion U.S. market for ETFs is poised to get a shot in the arm as Wall Street’s main regulator considers a plan for streamlining its approval process for the products.

The proposal set to be considered at an SEC meeting in Washington on Thursday would make it easier to bring new ETFs to market. It would lay out formal steps for setting up less-complicated funds, according to people familiar with the plan, eliminating the need for many issuers to seek a special order from the SEC to allow the funds to operate.

Jay Clayton, SEC chair nominee for Trump, testifies during a Senate Banking Committee confirmation hearing Bloomberg News
SEC chairman Jay Clayton wants to open up private markets to a wider range of investors.

The mutual fund industry has long complained about the wait and cost associated with getting the regulator to sign-off on new funds, while critics say the current system based on one-off approvals give advantages to more established firms. The SEC tried to address the issue in 2008, before shelving a proposal that aimed to “eliminate unnecessary regulatory burdens” as it focused attention on dealing with the global financial crisis.

“The main goal, as we understand it, is to streamline the process for straightforward ETFs to come to market and possibly level the regulatory field,” Michael Mundt, a partner at Stradley Ronon in Washington, said of the SEC’s new plan.

SEC Chairman Jay Clayton has made passing an ETF rule a priority since he took the helm in May 2017. He hired Dalia Blass, who worked on the 2008 proposal, to lead the agency’s investment management unit and listed the rule as a key part of his regulatory agenda.

Natalie Strom, a spokeswoman for Clayton, declined to comment.

While ETFs started as a way for investors to buy into indexes like the S&P 500 and pay minimal fees and taxes, investors now can purchase funds that employ strategies such as leverage and short selling or focus on narrow, thinly-traded market sectors.

The streamlined process the SEC is considering would target so-called plain vanilla ETFs, leaving firms wishing to list more complex products to seek approvals through the more laborious approach the regulator currently uses, according to two of the people who asked not to be named because the plan’s details haven’t been made public.

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In addition to the ETF rule, commissioners at Thursday’s meeting are set to consider final approval of a plan for exempting more small firms from disclosure requirements that critics say are unduly burdensome. The adoption would come two years after the SEC called for increasing to $250 million from $75 million the market-value ceiling for taking advantage of some reduced reporting requirements.

Commissioners also plan to consider finalizing changes to rules for how mutual funds make public disclosures on the liquidity of their investments. Also on the agenda are proposed changes to the rules for the SEC’s whistle-blower program and the agency’s agreement for coordinating with the Commodity Futures Trading Commission, the U.S.’s main swaps regulator.

Bloomberg News
SEC regulations ETFs Mutual funds Asset management Investment strategies Jay Clayton SEC S&P CFTC Money Management Executive
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