On July 10, 2013, the SEC issued exemptive orders allowing the applicants to utilize “self-indexing” ETFs without imposing certain requirements that were previously included in orders permitting this type of fund. Self-indexing ETFs seek to replicate the holdings of a proprietary index developed and owned by an affiliate of the ETF, the ETF’s investment adviser, or the ETF’s distributor. Self-indexing allows the ETF sponsor to avoid the costs typically associated with licensing third-party indexes and may also offer the sponsor more flexibility in designing customized ETF investment strategies.

Before these recent exemptive orders, the SEC generally required sponsors of self-indexing ETFs to address potential conflicts of interest specifically relating to the use of an index developed by an affiliate by imposing a number of conditions. Among other things, these conditions generally included: (i) requirements to promote transparency of the underlying index methodology; (ii) use of an unaffiliated third party to calculate the index; (iii) creation of certain firewall arrangements to separate the fund’s adviser and the index provider; and (iv) the adoption of additional policies and procedures to mitigate potential conflicts of interest specific to self-indexing.

The new exemptive orders eliminate most of these requirements, and instead rely primarily on daily transparency of the ETF’s portfolio holdings to address potential conflicts of interest. The ETFs utilizing self-indexing are required to disclose on the sponsor’s website, each day before trading begins on the ETF’s primary listing exchange, the identities and quantities of the portfolio securities, assets and other positions held by the fund that will form the basis for the fund’s calculation of its NAV at the end of the business day. These requirements are the same as the website disclosure requirements applicable to actively managed ETFs. Note that certain of the requirements previously applicable to self-indexing ETFs may still be required, in part, as a result of listing rules imposed by the exchange on which such self-indexing ETFs intend to be listed.