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Securities and Exchange Commission Adopts Long-Awaited ETF Rule

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September 27, 2019

Client Alert
On September 26, 2019, the Securities and Exchange Commission (“SEC”) adopted Rule 6c-11 under the Investment Company Act of 1940 (the “1940 Act”) and amendments to Form N-1A and Form N-8B-2 that overhaul the patchwork regulatory framework that currently governs the $3.32 trillion ETF industry. The adopted rule and form amendments (collectively, the “ETF Rule”) are largely similar, but not identical, to the versions that were proposed in June 2018 (the “Proposed Rule”).

The ETF Rule substantially replaces the current regime under which each ETF sponsor is required to obtain its own individual exemptive relief from certain provisions of the 1940 Act in order to offer and operate an ETF. It is the SEC’s stated position that the ETF Rule establishes a regulatory framework that: (1) reduces the expense and delay currently associated with forming and operating certain ETFs unable to rely on existing orders; and (2)  creates a level playing field for ETFs that can rely on the ETF Rule. As such, the SEC hopes the ETF Rule will enable increased product competition among ETF providers, which may lead to lower fees for investors, encourage financial innovation and increase investor choice in the ETF market.

In addition to the rule and form amendments under the 1940 Act, the SEC expressed its intent to soon issue an exemptive order that harmonizes certain related relief under the Securities Exchange Act of 1934 (the “Exchange Act”). In particular, the order provides exemptive relief to broker‑dealers and other persons from certain requirements under the Exchange Act with respect to ETFs relying on the ETF Rule.

The full text of the ETF Rule is available here. The SEC staff also released a fact sheet that is available here. The ETF Rule will become effective 60 days after publication of the Rule in the Federal Register; however, there will be a one-year transition period for compliance with the new form requirements. The following is a brief summary of some of the most notable components of the ETF Rule. We will provide a more detailed analysis of the ETF Rule in the coming weeks.

Additionally, we have provided a brief summary below of some of the notable differences between the Proposed Rule and the final ETF Rule. 

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