ETF Rule: What It Is and Why It Matters

The “ETF Rule” is a rule adopted by the U.S. Securities and Exchange Commission (SEC) that allows exchange-traded funds (ETFs) that meet certain conditions to go to market without the delay of obtaining an exemptive order. Passed in 2019, the rule also makes custom creation/redemption baskets available for all ETFs.

Key Takeaways

  • A new rule referred to as the “ETF Rule” was passed in September 2019 by the Securities and Exchange Commission (SEC). 
  • The rule removes "exemptive relief" regulations, enabling ETF issuers to more easily bring new strategies to market.
  • It also makes customized creation/redemption baskets available for all types of ETFs covered under its regulations.

Impact on "Exemptive Relief"

Designed to improve ETF regulation, the rule aims to streamline the conditions around exemptive relief, making it easier for companies to bring their ETFs to market if certain conditions are met. According to SEC Commissioner Hester M. Pierce, this will help codify regulations that began when ETFs were first launched in 1993. “A level playing field without long approval queues makes for better competition, which is good for investors, capital formation, and the health of our markets.” The rule applies to both passive and active open-ended funds, but does not cover unit investment trusts such as leveraged and inverse ETFs. By removing the need for a lengthy approval process, the “ETF Rule” may save companies up to six months and $25,000 for each new ETF.

Allowing for Custom Baskets

One of the other key attributes of the “ETF Rule” is the fact that it makes custom creation/redemption baskets available for all of the ETFs it covers. This will allow for potential tax benefits for companies issuing ETFs, and make it easier for companies and investors alike to understand transaction costs associated with those funds.

SEC Approval Status

Initially proposed in 2018, the “ETF Rule” was passed by the Securities and Exchange Commission in September 2019. The rule and its amendments are set to go into effect 60 days after its publication in the Federal Register.

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