SEC Imposes New Rules for ETFs | Wibest Broker

The Securities and Exchange Commission (SEC) said that it would now implement a new rule that will affect exchange-traded funds (ETFs). 

The Rule 6c-11 (the ETF rule) tries to simplify the process governing ETFs. It also aims to make the process of ETF launching faster, also lowering costs in the process.

The new rule also forgoes the exemptive-relief requirement, which ETF issuers had to file with the regulator. The requirement let them get special permission to go around rules in the Investment Company Act of 1940.

That Act, meanwhile, did not allow ETFs.

Since 1992, the authority has issued more than 300 exemptive orders that let more than 2,000 ETFs to launch. Total net assets for those climbed to more than $3.3 trillion.

In other words, the new rule will replace hundreds of those orders.

SEC Leveling the Playing Field

According to FactSet’s ETF research director Elisabeth Kashner, the rule will level the playing field for ETF issuers.

At present, the biggest names in the ETF space are Vanguard, State Street Corp, and BlackRock.

BlackRock Inc. reacted to the news by saying that it has long supported regulations that favor transparency.  It said it will review the new rule and provide feedback.

The new rule will allow for custom baskets, which contain securities that don’t match the ETF’s index.  This system has allowed BlackRock and State Street to tweak the portfolio’s holdings efficiently.

Custom baskets also help ETF providers to minimize capital gains from active and high-turnover strategies.

Custom baskets also increase access to “heartbeat trades.” These trades are transactions where investors deposit into an ETF to make a quick withdrawal.

The withdrawal, in turn, is in the form of shares that the ETF holds. As a result, it would avoid huge capital gains for the fund.