The SEC proposed new rules under the Investment Company Act of 1940 that would exempt exchange-traded funds ("ETFs") from certain provisions of the 1940 Act and rules thereunder. The rules would permit certain ETFs to begin operating without the expense and delay of obtaining an exemptive order from the SEC.

ETFs have required exemptions from certain provisions of the 1940 Act before they can commence operations. Since 1992, the SEC has issued 61 orders to ETFs and their sponsors. The proposed rules would codify the exemptive orders issued to ETFs:

  • Proposed Rule 6c-11 would provide several exemptions from the Act to permit ETFs to form and operate without the need to obtain individual exemptive relief from the SEC. The rule would codify most of the exemptions previously granted by the SEC to index-based ETFs and, pursuant to several recently-issued exemptive orders, would allow fully transparent actively managed ETFs.
  • Proposed Rule 12d-14 would allow investment companies to make larger investments in ETFs than currently permitted under the 1940 Act, which limits one investment company to acquiring no more than 3 percent of another investment company's shares. The exemptions in the proposed rule would be subject to several conditions designed to address the historical abuses associated with "pyramiding" schemes that often occurred with fund investment in other funds.
  • Proposed amendments to Form N-1A, which open-end funds use to register under the Act and offer their securities under the Securities Act of 1933, would accommodate the use of the form by ETFs. The proposed amendments are designed to provide key information to investors who purchase ETF shares in secondary market transactions, where most ETF investors (including retail investors) purchase their shares.

Please click for a copy of the proposing release.