Investment Services Regulatory Update - July 2018

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New Rules, Proposed Rules, Guidance and Alerts -

PROPOSED RULES -

SEC Proposes New Rule to Permit Certain ETFs to Operate Without an Exemptive Order -

On June 28, 2018, the SEC issued a proposed new rule under the Investment Company of 1940 (the 1940 Act) - Rule 6c-11—that would permit exchange-traded funds (ETFs) that satisfy certain conditions to launch and operate without first obtaining an exemptive order from the SEC. In connection with proposed Rule 6c-11, the SEC proposed to rescind certain exemptive orders that have been granted to ETFs that could rely on the proposed rule. The SEC also issued proposed amendments that would require additional prospectus and/or website disclosure of information concerning ETF trading costs, including as to bid-ask spreads and premiums and discounts from the ETF’s net asset value. At present, ETFs require specific exemptive relief from various provisions of the 1940 Act to operate. To date the SEC has granted more than 300 such orders, many with inconsistent terms and conditions. According to the proposing release, the proposed rule and amendments are “designed to create a consistent, transparent, and efficient regulatory framework for ETFs and to facilitate greater competition and innovation among ETFs. ”

Highlights of the SEC’s ETF rule proposal and amendments are as follows:

• Custom baskets permitted. In order to facilitate efficient ETF operation and, in view of differences in exemptive order terms among ETF sponsors, to level the playing field, Rule 6c-11 would provide flexibility with respect to the use of “custom baskets,” i.e., baskets that are composed of a non-representative selection of the ETF’s portfolio holdings (e.g., baskets that do not reflect a pro rata representation or representative sampling of the ETF’s portfolio holdings), or different baskets used in transactions on the same business day. The proposed rule would provide an ETF with the option of using custom baskets if it has adopted and implemented policies and procedures that “(i) set forth detailed parameters for the construction and acceptance of custom baskets that are in the best interests of the ETF and its shareholders, including the process for any revisions to, or deviations from, those parameters; and (ii) specify the titles or roles of the employees of the ETF’s investment adviser who are required to review each custom basket for compliance with those parameters.”

Please see full publication below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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