A busy day for the Securities and Exchange Commission (SEC). The open meeting held on June 28, 2018, resulted in votes on several final rules and rule proposals that had been noted as priorities and publicly discussed in recent speeches from SEC staff. Among other things, two significant items — exchange-traded fund (ETF) exemptive orders and amendments to Rule 22e-4, better known as the Liquidity Rule — were both impacted by the day’s work.
Potential Relief from Exemptive Order Process
In a long-awaited move, the SEC voted on Proposed Rule 6c-11 that would provide a workaround from the burdensome exemptive order process currently in place for new ETFs coming to market.
Under the proposed rule, ETFs would be organized as open-end funds under the Investment Company Act of 1940, and restrictions on ETFs organized as unit investments trusts or those using leverage would apply. However, upon satisfaction of certain conditions the proposed rule would lower the barrier to entry for ETF sponsors as well as provide new information to ETF investors.
The conditions noted within the proposed rule would require ETFs to provide daily portfolio transparency on their websites, as well as other information such as historical data regarding premiums, discount and bid-ask spreads. In addition, for those ETFs utilizing a custom basket, the ETF would be required to adopt written policies and procedures outlining specific parameters for their use. Other disclosures and recordkeeping requirements are also outlined in the release, including potential revisions to Form N-1A to further promote consistency between the current requirements for open-end funds and ETFs relying on the proposed rule.
For ETFs currently relying on exemptive relief, the SEC proposal generally would rescind those orders, in an effort to create a more consistent regulatory regime. However, certain exceptions are noted within the proposed rule.
There is a 60-day comment period open for the proposed rule and form amendments.
Amendments to Liquidity Rule Disclosure Requirements
As a reaction to the SEC’s outreach efforts since the Liquidity Rule was passed in October 2016, the amendments adopted in the June 28 open meeting were intended to provide clarity and address implementation hurdles noted by market participants within the original release.
Under the amendments, funds would need to discuss their liquidity risk management program in their annual or semi-annual shareholder report, rather than the quantitative detail currently pending as part of a fund’s Form N-PORT filing requirements. Other changes to Form N-PORT include the ability for a fund to divide its portfolio into more than one liquidity classification category, when doing so meets certain criteria (such as lowering the cost of compliance) without detracting from the quality of the information. In addition, changes were noted to the reporting of cash and cash equivalents within Form N-PORT.
We encourage industry participants to continue to monitor the SEC’s announcements regarding the Liquidity Rule for additional guidance that will assist funds in complying with these new requirements.
Please contact a member of your service team, or contact Marcy Kempf at firstname.lastname@example.org for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.