Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, March 5, 2008

SEC Proposes Rules to Ease Requirements for ETFs

As I reported earlier, the SEC voted to propose two new rules under the Investment Company Act to permit exchange-traded funds (ETFs) to operate without the need to obtain individual exemptive orders from the Commission.  Here is more detail about the proposed rules:

Proposed Rule 6c-11. Proposed Rule 6c-11 under the Act would provide several exemptions from the Act to permit ETFs to form and operate without the need to obtain individual exemptive relief from the Commission. The rule would codify most of the exemptions previously granted by the Commission to index-based ETFs and, pursuant to several recently-issued exemptive orders, to fully transparent actively managed ETFs.
Proposed Rule 12d1-4. Proposed Rule 12d1-4 under the Act would allow investment companies to make larger investments in ETFs than currently permitted under the Act, which limits one investment company to acquiring no more than 3 percent of another investment company’s shares. The exemptions in the proposed rule would be subject to several conditions designed to address the historical abuses associated with “pyramiding” schemes that often occurred with fund investment in other funds (so-called “fund of funds” arrangements).
Amendments to Form N-1A.  The proposed amendments to Form N-1A, which open-end funds use to register under the Act and offer their securities under the Securities Act of 1933, would accommodate the use of the form by ETFs. The proposed amendments are designed to provide key information to investors who purchase ETF shares in secondary market transactions, where most ETF investors (including retail investors) purchase their shares.

The comment period for the proposal will end 60 days from the date of publication of the proposed rule in the Federal Register.

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