Conformed to Federal Register version - sec.gov

1 Conformed to Federal Register version SECURITIES AND exchange COMMISSION 17 CFR Parts 239, 270, and 274 [Release Nos. 33-10515; IC-33140; File No. S7-15-18] RIN 3235-AJ60 exchange - traded Funds AGENCY: Securities and exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and exchange Commission (the Commission ) is proposing a new rule under the Investment Company Act of 1940 (the Investment Company Act or the Act ) that would permit exchange - traded funds ( ETFs ) that satisfy certain conditions to operate without the expense and delay of obtaining an exemptive order. In connection with the proposed exemptive rule, the Commission proposes to rescind certain exemptive orders that have been granted to ETFs and their sponsors. The Commission also is proposing certain disclosure amendments to Form N-1A and Form N-8B-2 to provide investors who purchase and sell ETF shares on the secondary market with additional information regarding ETF trading costs, regardless of whether such ETFs are structured as registered open-end management investment companies ( open-end funds ) or unit investment trusts ( UITs ).

2 Finally, the Commission is proposing related amendments to Form N-CEN. The proposed rule and form amendments are designed to create a consistent, transparent, and efficient regulatory framework for ETFs and to facilitate greater competition and innovation among ETFs. DATES: Comments should be received on or before October 1, 2018. 2 ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments: Use the Commission s Internet comment form ( ); or Send an email to Please include File Number S7-15-18 on the subject line. Paper Comments: Send paper comments to Brent J. Fields, Secretary, Securities and exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-15-18. This file number should be included on the subject line if email is used.

3 To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission s Internet website ( ). Comments are also available for website viewing and printing in the Commission s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 am and 3:00 pm. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission s website.

4 To ensure direct electronic receipt of such notifications, sign up through the Stay Connected option at to receive notifications by email. 3 FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman (Senior Counsel), Joel Cavanaugh (Senior Counsel), John Foley (Senior Counsel), Jacob D. Krawitz (Branch Chief), Melissa S. Gainor ( Senior Special Counsel), and Brian McLaughlin Johnson (Assistant Director), Investment Company Regulation Office, at (202) 551-6792, Sumeera Younis ( Branch Chief) and Christian Sandoe ( Assistant Director), Disclosure Review and Accounting Office, at (202) 551-6921, Division of Investment Management, Securities and exchange Commission, 100 F Street, NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment 17 CFR (new rule 6c-11) under the Investment Company Act [15 80a-1 et seq.]

5 ]; amendments to Form N-1A [referenced in 17 CFR ] under the Investment Company Act and the Securities Act of 1933 [15 77a et seq.] ( Securities Act ); and amendments to Forms N -8B-2 [referenced in 17 CFR ] and N -CEN [referenced in 17 CFR ] under the Investment Company 1 Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all references to rules under the Investment Company Act are to title 17, part 270 of the Code of Federal Regulations [17 CFR part 270]. 4 CONTENTS I. Introduction .. 6 A. Overview of exchange - traded Funds .. 8 B. Operation of exchange - traded Funds .. 11 II. Discussion .. 16 A. Scope of Proposed Rule 6c-11.

6 16 1. Organization as Open-End Funds .. 17 2. Index-Based ETFs and Actively Managed 24 3. Leveraged ETFs .. 28 B. Exemptive Relief under Proposed Rule 6c-11 .. 36 1. Treatment of ETF Shares as Redeemable Securities .. 37 2. Trading of ETF Shares at Market-Determined Prices .. 41 3. Affiliated 50 4. Additional Time for Delivering Redemption Proceeds .. 54 C. Conditions for Reliance on Proposed Rule 6c-11 .. 62 1. Issuance and Redemption of Shares .. 62 2. Listing on a National Securities exchange .. 70 3. Intraday Indicative Value .. 72 4. Portfolio Holdings .. 76 5. Baskets .. 88 6. Website Disclosure .. 107 7. Marketing .. 130 D. Recordkeeping .. 133 E. Share Class ETFs .. 137 F. Master-Feeder ETFs .. 139 G. Effect of Proposed Rule 6c-11 on Prior Orders .. 143 H. Amendments to Form N-1A .. 150 1. 150 2. Item 3 of Form N-1A .. 152 3.

7 Item 6 of Form N-1A .. 171 4. Item 11 of Form N-1A .. 174 5. Potential Alternatives to Current ETF Registration 176 I. Amendments to Form N-8B-2 .. 178 J. Amendments to Form N-CEN .. 181 III. Economic Analysis .. 182 A. Introduction .. 182 B. Economic Baseline .. 185 1. ETF Industry Growth and Trends .. 185 2. Exemptive Order Process .. 187 3. Market Participants .. 188 4. Secondary Market Trading, Arbitrage, and ETF Liquidity .. 193 C. Benefits and Costs of Proposed Rule 6c-11 and Amendments to Forms N-1A and N-8B-2 .. 201 1. Proposed Rule 6c-11 .. 202 2. Disclosure (Amendments to Forms N-1A and N-8B-2) .. 225 5 D. Effects on Efficiency, Competition, and Capital Formation .. 227 1. Efficiency .. 227 2. 231 3. Capital Formation .. 233 E. Reasonable Alternatives .. 234 1. Treatment of Existing Exemptive Relief .. 234 2. ETFs Organized as UITs.

8 235 3. Basket Flexibility .. 236 4. Website Disclosure of Every Basket Used by an ETF .. 237 5. The Use of a Structured Format for Additional Website Disclosures and the Filing of Additional Website Disclosures in a Structured Format on EDGAR .. 238 6. Treatment of Leveraged ETFs .. 240 F. Request for Comments .. 240 IV. Paperwork Reduction Act .. 243 A. Introduction .. 243 B. Proposed Rule 6c-11 .. 245 1. Website Disclosures .. 246 2. Recordkeeping .. 248 3. Policies and Procedures .. 249 4. Estimated Total Burden .. 251 C. Rule 0-2 .. 252 D. Form N-1A .. 253 E. Disclosure amendments to Forms N-8B-2 and S-6 .. 256 F. Form N-CEN .. 258 G. Request for Comments .. 259 V. INITIAL REGULATORY FLEXIBILITY 260 A. Reasons for and Objectives of the Proposed Actions .. 260 B. Legal Basis .. 261 C. Small Entities Subject to the Rule .. 261 D. Projected Reporting, Recordkeeping, and Other Compliance Requirements.

9 262 1. Rule 6c-11 .. 262 2. Disclosure and Reporting Requirements .. 263 E. Duplicative, Overlapping or Conflicting Federal Rules .. 265 F. Significant Alternatives .. 265 G. General Request for Comment .. 267 VI. CONSIDERATION OF IMPACT ON THE ECONOMY .. 268 VII. STATUTORY AUTHORITY .. 268 6 I. INTRODUCTION The Commission is proposing rule 6c-11 under the Investment Company Act to permit ETFs that satisfy certain conditions to operate without the expense and delay of obtaining an exemptive order from the Commission under the Act. This rule would modernize the regulatory framework for ETFs to reflect our 26 years of experience with these investment products. It is designed to create a consistent, transparent, and efficient regulatory framework for ETFs and to facilitate greater competition and innovation among ETFs. The Commission approved the first ETF in 1992.

10 Since then, ETFs registered with us have grown to $ trillion in total net They now account for approximately 15% of total net assets managed by investment companies,3 and are projected to continue to ETFs currently rely on exemptive orders, which permit them to operate as investment companies under the Act, subject to representations and conditions that have evolved over We have granted over 300 of these orders over the last quarter century, resulting in differences in representations and conditions that have led to some variations in the regulatory structure for existing 2 This figure is based on data obtained from Bloomberg. As of December 2017, there were 1,900 ETFs registered with the Commission.