SEC to discuss prospective rule that expedites ETF approval process

The SEC has set a date to consider a new rule that would speed the process of bringing an ETF to market.

On June 28, the SEC will discuss whether to propose regulations that would allow asset managers to sell certain types of ETFs without first gaining its approval, according to the commission’s agenda. Under current rules, wannabe ETF issuers must get SEC permission — a process known as exemptive relief — before selling funds under the Investment Company Act of 1940.

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A guard stands outside the headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington DC May 27, 2004. Photographer: Chris Kleponis/ Bloomberg News.
Chris Kleponis/Bloomberg News

It’s wonky stuff, but the new regulation has the potential to significantly shake-up the $3.6 trillion U.S. ETF market. Currently, the industry’s 80-plus issuers all operate under different orders that have inadvertently given some firms a competitive advantage. ETF advocates have been lobbying the SEC to level the playing field for years. Regulation that would have done it was first killed more than a decade ago.

The SEC’s agenda says rule 6c-11 would allow ETFs “that satisfy certain conditions to operate without first obtaining an exemptive order from the commission.” Issuers want the regulator to go further and make it easier for managers to choose the securities they add to or subtract from their ETFs when they issue and redeem shares. Some early adopters like BlackRock already have this flexibility, but newer entrants face greater restrictions.

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Above all others, millennials are likely to include the funds in their portfolios, Schwab says.

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“For existing ETF providers, probably the most significant thing is what flexibility they get around custom baskets,” said Jeremy Senderowicz, a partner at Dechert. “But for people getting into the market, it will make life easier in that they don’t have to do an exemptive application.”

If the regulator gives the nod to proposing the rule, a public comment period is likely before the SEC settles on the final version.

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