ETF BILD Submits Comment Letter to SEC on ETF Rule

Dear Mr. Fields:

Thank you for the opportunity to submit this letter in response to the request for comments contained in the above-captioned release (the “Proposing Release”) whereby the U.S. Securities and Exchange Commission (“Commission”) proposes Rule 6c-11 (“Rule 6c-11”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Rule 6c-11 would permit certain exchange-traded funds (“ETFs”) to operate without an exemptive order, subject to the conditions contained therein.

THREE ETF INDUSTRY PIONEERS DISCUSS INNOVATION – PAST AND FUTURE

ETF BILD was formed to stimulate discussion on the business of ETFs, and recently we had the pleasure of sitting down with three of the earliest innovators in the ETF industry, including our own ETF BILD co-founder John Jacobs, to capture their insights on what inspired them in the early days of ETFs and what is driving current and future innovation in the ETF industry.

SEC FINDS POTENTIAL ISSUES WITH ETFS THAT TRACK CUSTOMIZED INDEXES SPONSORED BY ENTITIES NOT REGISTERED AS INVESTMENT ADVISERS

Dalia Blass, Director of the SEC’s Division of Investment Management, in a recent speech questioned whether the provider of an index used by a single ETF should be registered as an investment adviser under the Investment Advisers Act of 1940.[i] Such indexes are sometimes called “bespoke indexes” because they are built at the request and to the specifications of a single sponsor in contrast to broad-based indexes used by asset managers and investors as benchmarks. Any SEC action on this issue could dramatically impact the burgeoning self-indexing segment of the ETF industry, including by adding another regulatory hurdle for new entrants.

THE ETF BILD PROJECT PRESENTS ITS FIRST LEADERSHIP DISCUSSION SESSION

ETF VETERANS DISCUSS IMPLICATIONS OF FINRA RULE 5250

From time to time, ETF BILD has the opportunity to discuss a variety of issues and topics with prominent individuals in the ETF industry. In connection therewith, we seek comments from our readership resulting in a full and thoughtful discussion around the issues and topics vital to the ETF Industry.

Recently, ETF BILD sat down to speak with three prominent veterans in the ETF space to capture their insights on FINRA Rule 5250, Payments for Market Making, and its implications.

FIRST ITEM ON YOUR 2018 “TO DO” LIST: SEND COMMENTS TO THE SEC ABOUT THE PROPOSED NEW ETF RULE

Ten years after it tried to adopt an ETF rule, the SEC has once again announced that it will propose a rule allowing a firm to enter the ETF business without first obtaining an exemptive order. Perhaps more importantly, the new ETF rule will level the regulatory playing field for all ETF sponsors.  While all of the ETF sponsors will be playing on the same field, it will be vitally important for the industry to provide the SEC with input through comment letters, meetings with its staff and other means so that level playing field has as few regulatory puddles and loose turf as possible. The SEC staff likely will look first to those exemptive orders when drafting the rule, which contain a number of granular restrictions and conditions that should be jettisoned to produce a more flexible rule that still protects ETF investors. The ETF industry also can urge the SEC to adopt a rule that clarifies what types of exchange-traded vehicles can call themselves “ETFs.”

WHY ETFs FAIL: POST LAUNCH

The ETF BILD Project is presenting this paper to create a dialogue and place emphasis on post-launch activities for new ETFs. The industry has done a commendable job of explaining how to launch an ETF; we want to delve into the important activities that are a must for creating a successful ETF after it has been launched.

BOARDS NEED TO START LAYING THE GROUNDWORK FOR OVERSEEING ETF LIQUIDITY RISK MANAGEMENT PROGRAMS

Exchange-traded fund (ETF) boards soon will be knee deep in reports and presentations designed to facilitate their compliance with the SEC’s new liquidity rule. Rule 22e-4 under the Investment Company Act of 1940 will require ETFs (and mutual funds) by December 1, 2018 (June 1, 2019 for ETF complexes with less than $1 billion of assets) to have a liquidity risk management (LRM) program and imposes comprehensive new portfolio liquidity responsibilities on boards when overseeing the LRM programs....