By Luke Oliver, Head of U.S. ETF Capital Markets for Xtrackers, DWS
The Securities and Exchange Commission (SEC) announced Thursday, September 26th, its final version of rule 6c-11 or the “ETF rule”. The long-awaited regulation may be a significant step in the evolution of the exchange-traded fund (ETF) industry. At its core, the rule creates a simplified, consistent framework for registering most ETFs abiding by conditions that increase the relevancy of investor disclosures. The ETF rule replaces the relatively lengthy and expensive approval process for individual issuers, providing uniform standards for the vehicle. This potentially allows more access to the ETF space and most notably gives all issuers, new and old, access to flexible portfolio baskets – creating potential efficiencies for investors.
What does the SEC’s new rule 6c-11 for ETFs mean for investors?
The ETF rule will harmonize the ETF regulatory framework and standards, creating a level playing field for ETF competition and innovation. By making it easier for ETFs to come to market, investors may receive more comprehensive ETF exposure as the market will more freely be able to determine coverage as opposed to regulators.
Investor benefits from main conditions
|Condition||ETFs must…||Potential benefit|
|Daily portfolio transparency||Publish holdings on their website before trading begins each business day||Streamlined, relevant information will be easily accessible|
|Trading data displayed on website||DiscloseNet Asset Value (NAV), market price, premium/discount statistics, and rolling 30-day bid-ask spreads||Simplified metrics help evaluate total trading costs to avoid misinterpretations|
|Written policies for the use of custom baskets||Produce detailed parameters for the optionality in baskets||Alignment of shareholder interests and operational efficiency|
Source: Securities and Exchange Commission
How could this impact the ETF industry?
By removing the costly and time-consuming application hurdle for issuers looking to launch ETFs, we can expect new issuers to enter the ETF space, new exposures to be covered and overall growth and innovation for the ETF market.
All issuers will now possess the ability to use custom baskets on creation/redemptions, which levels the playing field for tax efficiency and optimizing portfolios. Custom or non-pro rata baskets could revolutionize and create further efficiencies in the fixed income ETF market.
How might this impact costs associated with ETFs?
The new rule comes as potentially good news to both ETF investors and issuers, as the new rule could reduce operational costs for ETF issuers in regards to launching and operating funds by removing the bespoke exemptive relief process and eliminating irrelevant disclosure statements.
Improved basket flexibility for portfolio managers could also reduce bid-ask spreads, and thus, lower transaction costs for investors.
Does this change the disclosures investors should look for when evaluating ETFs?
Most issuers under the new rule 6c-11 will not have to change their operations significantly, as the rule’s conditions are largely in line with previous exemptive orders, general market practices, or simply make information necessary for investors more accessible.
Certain additional liquidity metrics will now be directly available on an ETF’s website to help investors analyze ETF total costs.
The rule really affects issuers the most and is a relatively light touch for the advisor community.
What products are covered under rule 6c-11?
|Investment vehicles included under Rule 6c-11||Investment vehicles not included under Rule 6c-11|
|Traditional index-based ETFs||Exchange traded notes (ETNs)|
|Traditional active ETFs||Leveraged and Inverse ETFs|
Unit Investment TrustsInverse ETFs Unit Investment
Trusts Master-Feeder Funds
Master-Feeder FundsShare-Class ETFs
Source: Securities Exchange Commission
How was DWS involved?
The SEC met with various industry professionals to solicit feedback and implemented a practical rule which should benefit investors and the industry. After the initial draft of the rule was published, Luke Oliver, as well as members of DWS legal and regulatory affairs, had an opportunity to meet with the SEC in Washington D.C. to discuss the proposal in person. DWS was happy to see that several of our comments were taken into consideration in the final rule. Notably, restrictions of prior day (T-1) orders which could have worsened spreads, posting of baskets to issuer websites which would not have added any value to investors and trading calculators that could have provided inaccurate data to investors.