The SEC announced today it has adopted the long awaited Rule 6c-11, which will eliminate the need for certain exchange traded funds (ETFs) to obtain the lengthy and expensive exemptive relief that, until now, has been necessary to operate under U.S. securities laws. This game changing move establishes a clear and consistent framework for the vast majority of ETFs operating today, and we anticipate it will significantly accelerate the timeline to launch an ETF. Most importantly, it will open the door for new entrants, leading to more investment choices for investors.  
 
ETFs have seen tremendous growth and popularity since first being introduced in 1992, particularly over the past decade as investors continue to recognize the cost and tax benefits of ETFs. To date, the SEC has issued over 300 exemptive orders allowing ETFs to operate under the Investment Company Act of 1940. However, the exemptive relief granted was not always the same for ETF issuers — as such, only certain ETF issuers were previously allowed to use custom baskets. Under the new rule, all issuers who will rely on the rule will be able to use custom baskets upon adopting board approved policies and procedures focused on meeting the best interests of the ETF and its shareholders. Under Rule 6c-11, previously issued exemptive orders will be rescinded one year after the effective date for ETFs that will be allowed to operate under the new rule.
 
As with any rule, the following are the exemptions and conditions to note:
 

 
Other highlights from the release include:

• The decision not to rescind previously issued exemptive relief for fund of funds,
• Various amendments to Forms N-1A and Form N-8B-2 in an attempt to provide more useful information to ETF investors, and
• Issuance of an exemptive order that grants similar relief to broker-dealers under the Securities Exchange Act of 1934.

The new rule is effective 60 days after publication in the Federal Register, but issuers will have a one year transition period to become compliant. To the extent you may have avoided issuing ETFs because of the significant barriers of entry, now is the time to reconsider your strategy.
 
Contact Jeff Haneline at jhaneline@cohencpa.com or a member of your service team to discuss this topic further. Read the final rule here.

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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.