What should a firm consider prior to launching a Rule 6c-11 (transparent) and/or non-transparent ETF?
Entrants to the ETF space, prior to launch, should identify all necessary regulatory, operational and capital markets needs they may require. Just as important are the areas of trust structure, start up and ongoing costs, as well as a plan for asset gathering. Developing and following a clear, cost-effective game plan with the right partners to assist you is crucial to success.
A major consideration and crucial step will be to determine who will be the adviser for your ETF(s). Rule 6c-11 has done away with an adviser’s need to file relief for transparent ETFs while the recently approved forms of non-transparent ETFs will require an adviser to obtain exemptive relief. Many asset managers can act as their own ETF adviser for either transparent and/or non-transparent ETFs while others may need assistance. To make this decision, firms should focus on their internal experience and capabilities, or if necessary their ability to source partners who can provide these essential skills. Explore the importance of the ETF adviser in depth with legal and compliance resources who are familiar with ETFs prior to making this vital decision.
The selection of an experienced service provider (administration, accounting, transfer agent, custody and distribution) is an operational necessity as is determining the type of ’40 Act Trust to utilize. Joining an existing multiple series trust (which provides an existing experienced board of trustees, trust officers, trust chief compliance officer, independent legal counsel, independent audit and tax firm), using your own existing trust (if available) or creating a new trust are all viable options to explore.
Identifying sources of AUM to help decide the ETF strategy and the proper ETF structure is the first step. There are two categories to consider. “Captive AUM” refers to current client assets that you can legally, compliantly and efficiently bring to an ETF as part of, or shortly after, launch. “Captured AUM” refers to assets gathered via traditional wholesaling and marketing activities. If you do not have Captive AUM, a well-thought out wholesale and marketing plan to capture AUM is essential. For example, identifying wire houses, regional platforms and RIAs who currently use your existing products, and indicate strong interest in owning your ETF once launched, will help you target AUM levels and plan for yearly revenues and expenses.
Mutual funds trade in the “primary market” and ETFs trade in the “secondary market”. ETFs therefore rely greatly on the firms involved daily in the ETF capital markets. Authorized Participants provide for creation/redemption efficiency. Lead Market Makers and other liquidity providers offer liquidity and strive to keep bid/ask spreads tight. Listing exchanges monitor market quality and offer new ETF issuers support via unique internal offerings. Relationships with the members of the ETF capital markets are crucial to success.
At U.S. Bank, we can help you find solutions to these critical considerations to ensure an efficient and well thought-out ETF launch.
