The Securities and Exchange Commission (SEC) is always amending and changing rules to be useful to current market conditions, and exchange traded funds (ETFs) have been the recent focus. Two new rules under the Investment Company Act of 1940 were re-examined in reference to the creation of and investment into ETFs.

The first rule would an ETF to begin operations without first getting exemptive relief from the commission. The rule would apply to traditional index-based ETFs and actively
managed ETFs, which have recently gained approval, explains Paul

If an ETF provider wants to rely on the first rule, there are some conditions that must be met. Among them:

  • Transparency of holdings
  • A listing on a national securities exchange
  • In sales literature, and ETF must be identified as such
  • While the rules don’t address conflicts of interest specifically,
    there are already such firewalls in place through federal laws and they
    still apply

The second would facilitate investments by other investment companies into ETFs in excess of limits currently in place without getting permission first. Current limits are capped at 3%.

The limit can be exceeded if the following conditions are met:

  • The exemption applies only to acquiring funds that don’t "control" an ETF
  • Shares have to be sold in secondary transactions
  • An acquired ETF can’t itself be a fund of funds
  • Sales charges and service fees are limited

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.