SEC Removes Major Barrier to Entry for New ETFs

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The Securities and Exchange Commission passed a new rule Thursday morning that simplifies exchange traded fund launches. The new rule allows asset managers to go to market directly with new ETFs without having to obtain an exemptive order.

“The newly released SEC rule is a huge win for advisors and investors that have grown comfortable in using ETFs,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “The rules will provide greater transparency about the trading costs investors should expect with individual ETFs, should allow asset managers to work more closely with institutional investors to support liquidity of these ETFs and provide guidelines for asset managers seeking to launch new products in a timely manner, which should drive price competition.”

The rule will become effective 60 days after it’s published in the Federal Register.

Previously, asset managers had to file new ETFs for registration for “exemptive relief,” which is the same process for mutual funds, “which meant every ETF provider had to wait in line, have their filing reviewed,” Rosenbluth said.

“This should facilitate greater competition and innovation in the ETF marketplace by lowering barriers to entry,” the SEC said. “The actions announced today will replace hundreds of individualized exemptive orders with a single rule.”

The commission was scheduled to vote on the rule change Wednesday, but cancelled the meeting without a rationale.

The rule will only apply to those ETFs structured as open-end funds, not unit investment trusts, leverage or inverse ETFs, those structured as a share class of a multi-class fund and non-transparent ETFs.

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To comply, ETF providers must provide daily portfolio transparency on the fund’s website, create custom basket policies and procedures, and disclose certain information on the website.

Further, one year after the effective date of the rule, the commission will rescind exemptive relief granted previously to ETFs that can comply with the new rule. Certain ETFs under the master-feeder arrangement will be grandfathered in, and the SEC will not rescind exemptive relief for ETF fund of funds arrangements.

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