37332 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

1Unless otherwise noted, all references to 

statutory sections are to the Investment Company 

Act, and all references to rules under the 

Investment Company Act are to title 17, part 270 

of the Code of Federal Regulations [17 CFR part 

270]. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 239, 270, and 274 

[Release Nos. 33–10515; IC–33140; File No. 

S7–15–18] 

RIN 3235–AJ60 

Exchange-Traded Funds 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (the ‘‘Commission’’) is 

proposing a new rule under the 

Investment Company Act of 1940 (the 

‘‘Investment Company Act’’ or the 

‘‘Act’’) that would permit exchangetraded funds (‘‘ETFs’’) that satisfy 

certain conditions to operate without 

the expense and delay of obtaining an 

exemptive order. In connection with the 

proposed exemptive rule, the 

Commission proposes to rescind certain 

exemptive orders that have been granted 

to ETFs and their sponsors. The 

Commission also is proposing certain 

disclosure amendments to Form N–1A 

and Form N–8B–2 to provide investors 

who purchase and sell ETF shares on 

the secondary market with additional 

information regarding ETF trading costs, 

regardless of whether such ETFs are 

structured as registered open-end 

management investment companies 

(‘‘open-end funds’’) or unit investment 

trusts (‘‘UITs’’). Finally, the Commission 

is proposing related amendments to 

Form N–CEN. The proposed rule and 

form amendments are designed to create 

a consistent, transparent, and efficient 

regulatory framework for ETFs and to 

facilitate greater competition and 

innovation among ETFs. 

DATES: Comments should be received on 

or before October 1, 2018. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number S7– 

15–18 on the subject line. 

Paper Comments 

• Send paper comments to Brent J. 

Fields, Secretary, Securities and 

Exchange Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–15–18. This file number 

should be included on the subject line 

if email is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s internet website 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. 

Studies, memoranda, or other 

substantive items may be added by the 

Commission or staff to the comment file 

during this rulemaking. A notification of 

the inclusion in the comment file of any 

such materials will be made available 

on the Commission’s website. To ensure 

direct electronic receipt of such 

notifications, sign up through the ‘‘Stay 

Connected’’ option at www.sec.gov to 

receive notifications by email. 

FOR FURTHER INFORMATION CONTACT: 

Zeena Abdul-Rahman (Senior Counsel), 

Joel Cavanaugh (Senior Counsel), John 

Foley (Senior Counsel), Jacob D. Krawitz 

(Branch Chief), Melissa S. Gainor 

(Senior Special Counsel), and Brian 

McLaughlin Johnson (Assistant 

Director), Investment Company 

Regulation Office, at (202) 551–6792, 

Sumeera Younis (Branch Chief) and 

Christian Sandoe (Assistant Director), 

Disclosure Review and Accounting 

Office, at (202) 551–6921, Division of 

Investment Management, Securities and 

Exchange Commission, 100 F Street NE, 

Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: The 

Commission is proposing for public 

comment 17 CFR 270.6c–11 (new rule 

6c–11) under the Investment Company 

Act [15 U.S.C. 80a–1 et seq.]; 

amendments to Form N–1A [referenced 

in 17 CFR 274.11A] under the 

Investment Company Act and the 

Securities Act of 1933 [15 U.S.C. 77a et 

seq.] (‘‘Securities Act’’); and 

amendments to Forms N–8B–2 

[referenced in 17 CFR 274.12] and N– 

CEN [referenced in 17 CFR 274.101] 

under the Investment Company Act.1

Table of Contents 

I. Introduction 

A. Overview of Exchange-Traded Funds 

B. Operation of Exchange-Traded Funds 

II. Discussion 

A. Scope of Proposed Rule 6c–11 

1. Organization as Open-End Funds 

2. Index-Based ETFs and Actively Managed 

ETFs 

3. Leveraged ETFs 

B. Exemptive Relief Under Proposed Rule 

6c–11 

1. Treatment of ETF Shares as 

‘‘Redeemable Securities’’ 

2. Trading of ETF Shares at MarketDetermined Prices 

3. Affiliated Transactions 

4. Additional Time for Delivering 

Redemption Proceeds 

C. Conditions for Reliance on Proposed 

Rule 6c–11 

1. Issuance and Redemption of Shares 

2. Listing on a National Securities 

Exchange 

3. Intraday Indicative Value 

4. Portfolio Holdings 

5. Baskets 

6. Website Disclosure 

7. Marketing 

D. Recordkeeping 

E. Share Class ETFs 

F. Master-Feeder ETFs 

G. Effect of Proposed Rule 6c–11 on Prior 

Orders 

H. Amendments to Form N–1A 

1. Definitions 

2. Item 3 of Form N–1A 

3. Item 6 of Form N–1A 

4. Item 11 of Form N–1A 

5. Potential Alternatives to Current ETF 

Registration Forms 

I. Amendments to Form N–8B–2 

J. Amendments to Form N–CEN 

III. Economic Analysis 

A. Introduction 

B. Economic Baseline 

1. ETF Industry Growth and Trends 

2. Exemptive Order Process 

3. Market Participants 

4. Secondary Market Trading, Arbitrage, 

and ETF Liquidity 

C. Benefits and Costs of Proposed Rule 

6c–11 and Amendments to Forms N–1A 

and N–8B–2 

1. Proposed Rule 6c–11 

2. Disclosure (Amendments to Forms N–1A 

and N–8B–2) 

D. Effects on Efficiency, Competition, and 

Capital Formation 

1. Efficiency 

2. Competition 

3. Capital Formation 

E. Reasonable Alternatives 

1. Treatment of Existing Exemptive Relief 

2. ETFs Organized as UITs 

3. Basket Flexibility 

4. Website Disclosure of Every Basket Used 

by an ETF 

5. The Use of a Structured Format for 

Additional Website Disclosures and the 

Filing of Additional Website Disclosures 

in a Structured Format on EDGAR 

6. Treatment of Leveraged ETFs 

F. Request for Comments 

IV. Paperwork Reduction Act 

A. Introduction 


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Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37333 

2This figure is based on data obtained from 

Bloomberg. As of December 2017, there were 1,900 

ETFs registered with the Commission. See id. 

3 ICI, 2018 Investment Company Fact Book (58th 

ed., 2018) (‘‘2018 ICI Fact Book’’), available at 

https://www.ici.org/pdf/2018_factbook.pdf, at 96. 

When the Commission first proposed a rule for 

ETFs in 2008, aggregate ETF assets were less than 

7% of total net assets held by mutual funds. See 

Exchange-Traded Funds, Investment Company Act 

Release No. 28193 (Mar. 11, 2008) [73 FR 14618 

(Mar. 18, 2008)] (‘‘2008 ETF Proposing Release’’). 

4See Greg Tusar, The evolution of the ETF 

industry, Pension & Investments (Jan. 31, 2017), 

available at http://www.pionline.com/article/ 

20170131/ONLINE/170139973/the-evolution-of-theetf-industry (describing projections that ETF assets 

could double to $6 trillion by 2020). 

5As the orders are subject to the terms and 

conditions set forth in the applications requesting 

exemptive relief, references in this release to 

‘‘exemptive relief’’ or ‘‘exemptive orders’’ include 

the terms and conditions described in the related 

application. See, e.g., infra footnote 6. 

6Since 2000, our ETF exemptive orders have 

provided relief for future ETFs. See, e.g., Barclays 

Global Fund Advisors, Investment Company Act 

Release Nos. 24394 (Apr. 17, 2000) [65 FR 21215 

(Apr. 20, 2000)] (notice) and 24451 (May 12, 2000) 

(order) and related application (‘‘Barclays Global 

2000’’). This relief has allowed ETF sponsors to 

form ETFs without filing new applications to the 

extent that the new ETFs meet the terms and 

conditions set forth in the exemptive order. 

Applications granted before 2000, unless 

subsequently amended, did not include this relief. 

7As discussed below, the scope of proposed rule 

6c–11 does not include ETFs that: (i) Are organized 

as UITs; (ii) seek to exceed the performance of a 

market index by a specified multiple or to provide 

returns that have an inverse relationship to the 

performance of a market index, over a fixed period 

of time (‘‘leveraged ETFs’’); or (iii) are structured as 

a share class of a fund that issues multiple classes 

of shares representing interests in the same 

portfolio (‘‘share class ETFs’’). These ETFs would 

continue to operate pursuant to the terms of their 

exemptive orders. See infra sections II.A.1 (UIT 

ETFs), II.A.3 (leveraged ETFs), and II.E (share class 

ETFs). 

8See 2008 ETF Proposing Release, supra footnote 

3. Comment letters on the 2008 ETF Proposing 

Release are available at http://www.sec.gov/ 

comments/s7-07-08/s70708.shtml. 

9See, e.g., Request for Comment on ExchangeTraded Products, Exchange Act Release No. 75165 

(June 12, 2015) [80 FR 34729 (June 17, 2015)] 

(‘‘2015 ETP Request for Comment’’), at section I.A; 

Report of the Staffs of the CFTC and SEC to the 

Joint Advisory Committee on Emerging Regulatory 

Issues, Findings Regarding the Market Events of 

May 6, 2010 (Sept. 30, 2010) (‘‘Final May 6 

Report’’), available at http://www.sec.gov/news/ 

studies/2010/marketevents-report.pdf. Comment 

letters on the 2015 ETP Request for Comment are 

available at https://www.sec.gov/comments/s7-11- 

15/s71115.shtml. 

10ETFs are investment companies registered 

under the Investment Company Act. See 15 U.S.C. 

80a–3(a)(1). Other types of ETPs are pooled 

investment vehicles with shares that trade on a 

securities exchange, but they are not ‘‘investment 

companies’’ under the Act because they do not 

invest primarily in securities. Such ETPs may 

invest primarily in assets other than securities, such 

as futures, currencies, or physical commodities 

(e.g., precious metals). Still other ETPs are not 

pooled investment vehicles. For example, 

exchange-traded notes are senior, unsecured, 

unsubordinated debt securities that are linked to 

the performance of a market index and trade on 

securities exchanges. 

11The Act defines ‘‘redeemable security’’ as any 

security that allows the holder to receive his or her 

proportionate share of the issuer’s current net assets 

upon presentation to the issuer. 15 U.S.C. 80a– 

2(a)(32). While closed-end fund shares are not 

redeemable, certain closed-end funds may elect to 

repurchase their shares at periodic intervals 

pursuant to 17 CFR 270.23c–3 (rule 23c–3) under 

the Act (‘‘interval funds’’). Based on staff analysis, 

there were 39 interval funds, representing 

approximately $21 billion in assets, in 2017. Other 

closed-end funds may repurchase their shares in 

tender offers pursuant to 17 CFR 240.13e–4 (rule 

Continued 

B. Proposed Rule 6c–11 

1. Website Disclosures 

2. Recordkeeping 

3. Policies and Procedures 

4. Estimated Total Burden 

C. Rule 0–2 

D. Form N–1A 

E. Disclosure Amendments to Forms 

N–8B–2 and S–6 

F. Form N–CEN 

G. Request for Comments 

V. Initial Regulatory Flexibility Analysis 

A. Reasons for and Objectives of the 

Proposed Actions 

B. Legal Basis 

C. Small Entities Subject to the Rule 

D. Projected Reporting, Recordkeeping, and 

Other Compliance Requirements 

1. Rule 6c–11 

2. Disclosure and Reporting Requirements 

E. Duplicative, Overlapping or Conflicting 

Federal Rules 

F. Significant Alternatives 

G. General Request for Comment 

VI. Consideration of Impact on the Economy 

VII. Statutory Authority 

I. Introduction 

The Commission is proposing rule 

6c–11 under the Investment Company 

Act to permit ETFs that satisfy certain 

conditions to operate without the 

expense and delay of obtaining an 

exemptive order from the Commission 

under the Act. This rule would 

modernize the regulatory framework for 

ETFs to reflect our 26 years of 

experience with these investment 

products. It is designed to create a 

consistent, transparent, and efficient 

regulatory framework for ETFs and to 

facilitate greater competition and 

innovation among ETFs. 

The Commission approved the first 

ETF in 1992. Since then, ETFs 

registered with us have grown to $3.4 

trillion in total net assets.2 They now 

account for approximately 15% of total 

net assets managed by investment 

companies,3 and are projected to 

continue to grow.4 ETFs currently rely 

on exemptive orders, which permit 

them to operate as investment 

companies under the Act, subject to 

representations and conditions that 

have evolved over time.5 We have 

granted over 300 of these orders over the 

last quarter century, resulting in 

differences in representations and 

conditions that have led to some 

variations in the regulatory structure for 

existing ETFs.6

Proposed rule 6c–11 would simplify 

this regulatory framework by 

eliminating conditions included within 

our exemptive orders that we no longer 

believe are necessary for our exemptive 

relief and removing historical 

distinctions between actively managed 

and index-based ETFs. In connection 

with the proposed rule, we also propose 

to rescind certain exemptive orders that 

have been granted to ETFs and their 

sponsors. As a result, proposed rule 

6c–11 would level the playing field for 

ETFs that are organized as open-end 

funds and pursue the same or similar 

investment strategies.7 The proposed 

rule also would assist the Commission 

with regulating ETFs, as funds covered 

by the rule would no longer be subject 

to the varying provisions of exemptive 

orders granted over time, and instead 

would be subject to a consistent 

regulatory framework. Furthermore, 

creating an efficient regulatory 

framework for ETFs would allow 

Commission staff and industry 

resources to focus the exemptive order 

process on products that do not fall 

within the scope of our proposed rule. 

In addition, we are proposing certain 

disclosure amendments to provide 

additional information to investors who 

purchase and sell ETF shares in the 

secondary markets, and to provide 

investors who purchase UITs with the 

same disclosures that we propose to 

require of ETFs organized as open-end 

funds. The proposed amendments 

would include new disclosures 

regarding certain unique costs 

associated specifically with ETFs, such 

as the bid-ask spread and premiums and 

discounts from the ETF’s net asset value 

(‘‘NAV’’). 

Our proposal takes into account the 

comments we received in response to 

our 2008 ETF proposal, which was 

designed to codify the exemptive relief 

that had been issued to ETFs at that 

time.8 Developments in the ETF 

industry since the 2008 proposal and 

interim Commission actions also have 

informed the parameters of proposed 

rule 6c–11 and the related disclosure 

amendments that we are proposing.9

A. Overview of Exchange-Traded Funds 

ETFs are a type of exchange-traded 

product (‘‘ETP’’).10 ETFs possess 

characteristics of both mutual funds, 

which issue redeemable securities, and 

closed-end funds, which generally issue 

shares that trade at market-determined 

prices on a national securities exchange 

and are not redeemable.11 Because ETFs 


daltland on DSKBBV9HB2PROD with PROPOSALS4
37334 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

13e–4) under the Securities Exchange Act of 1934 

(the ‘‘Exchange Act’’). 

12Historically, ETFs have been organized as 

open-end funds or UITs. See 15 U.S.C. 80a–5(a)(1) 

(defining the term ‘‘open-end company’’) and 15 

U.S.C. 80a–4(2) (defining the term ‘‘unit investment 

trust’’). Some fund groups have multiple orders 

covering different types of ETFs (e.g., one order 

covering ETFs organized as UITs and another 

covering ETFs organized as open-end funds or one 

order covering index-based ETFs and another 

covering actively managed ETFs). 

13See 15 U.S.C. 80a–6(c). 

14Additionally, ETFs regularly request relief from 

17 CFR 242.101 and 242.102 (rules 101 and 102 of 

Regulation M); section 11(d)(1) of the Exchange Act 

and 17 CFR 240.11d1–2 (‘‘rule 11d1–2’’ under the 

Exchange Act); certain other rules under the 

Exchange Act (i.e., 17 CFR 240.10b–10, 240.10b–17, 

240.14e–5, 240.15c1–5, and 240.15c1–6 (rules 10b– 

10, 10b–17, 14e–5, 15c1–5, and 15c1–6)); and 17 

CFR 242.200(g) (rule 200(g) of Regulation SHO). See 

2015 ETP Request for Comment, supra footnote 9, 

at section I.D.2 (discussing the exemptive and noaction relief granted to ETPs under the Exchange 

Act and the listing process for ETP securities for 

trading on a national securities exchange). 

15These estimates are based on trade and quote 

data from the New York Stock Exchange and Trade 

Reporting Facility data from FINRA. 

16See, e.g., Chris Dieterich, Are You An ETF 

‘Trader’ Or An ETF ‘Investor’?, Barrons (Aug. 8, 

2017), available at https://www.barrons.com/ 

articles/are-you-an-etf-trader-or-an-etf-investor1470673638; Greenwich Associates, Institutions 

Find New, Increasingly Strategic Uses for ETFs 

(May 2012) (‘‘More than one-in-five asset managers 

that use [ETFs] report employing ETFs for active 

exposures in domestic equities and commodities, 

and about 17% note using them for active 

exposures in international equities.’’); Joe 

Renninson, Institutional Investors Boost Ownership 

of ETFs, Financial Times (Apr. 13, 2017), available 

at https://www.ft.com/content/c70113ac-ab83-33aca624-d2d874533fb0?mhq5j=e7. 

17For instance, ETFs typically do not bear 

distribution or shareholder servicing fees. In 

addition, ETFs that transact on an in-kind basis can 

execute changes in the ETF’s portfolio without 

incurring brokerage costs, leading to transaction 

cost savings. 18The Commission historically has referred to 

ETFs that have stated investment objectives of 

maintaining returns that correspond to the returns 

of a securities index as ‘‘index-based’’ ETFs. See, 

e.g., Parker Global Strategies, LLC, et al., Investment 

Company Act Release Nos. 32528 (Mar. 10, 2017) 

[82 FR 14043 (Mar. 16, 2017)] (notice) and 32595 

(Apr. 5, 2017) (order) and related application 

(‘‘Parker Global Strategies’’). 

19 Inverse ETFs are often marketed as a way for 

investors to profit from, or at least hedge their 

exposure to, downward moving markets. See infra 

section II.A.3. 20An actively managed ETF’s investment adviser, 

like an adviser to any actively managed mutual 

fund, generally selects securities consistent with the 

ETF’s investment objectives and policies without 

trying to track the performance of a corresponding 

index. Actively managed ETFs represent 

approximately 1.3% of total ETF assets as of 

September 2017. Based on data obtained from the 

Market Information Data Analytics System 

(‘‘MIDAS’’), Bloomberg, and Morningstar Direct. 

21Our exemptive orders typically contain a 

representation by the applicant that an authorized 

participant will be either: (a) A broker or other 

participant in the continuous net settlement system 

of the National Securities Clearing Corporation, a 

clearing agency registered with the Commission and 

affiliated with the Depository Trust Company 

(‘‘DTC’’), or (b) a DTC participant, which has 

executed a participant agreement with the ETF’s 

distributor and transfer agent with respect to the 

creation and redemption of creation units. See, e.g., 

Emerging Global Advisors, LLC, et al., Investment 

Company Act Release Nos. 30382 (Feb. 13, 2013) 

[78 FR 11909 (Feb. 20, 2013)] (notice) and 30423 

(Mar. 12, 2013) (order) and related application. 

Proposed rule 6c–11(a) would define ‘‘authorized 

participant’’ as a member or participant of a 

clearing agency registered with the Commission, 

which has a written agreement with the ETF or one 

of its service providers that allows the authorized 

participant to place orders for the purchase and 

redemption of creation units. 

22See David J. Abner, The ETF Handbook: How 

to Value and Trade Exchange Traded Funds, 2nd 

ed. (2016) (‘‘ETF Handbook’’). 

have characteristics that distinguish 

them from the types of investment 

companies contemplated by the Act, 

they require exemptions from certain 

provisions of the Investment Company 

Act in order to operate. The 

Commission (and Commission staff 

under delegated authority) now 

routinely grants exemptive orders 

permitting ETFs to operate as 

investment companies under the 

Investment Company Act, generally 

subject to the provisions of the Act 

applicable to open-end funds (or 

UITs).12 These exemptive orders reflect 

our determination that, based on the 

factual representations offered by the 

applicants and the conditions to which 

the applicants have agreed, the 

requested relief is necessary or 

appropriate in the public interest and 

consistent with the protection of 

investors and the purposes fairly 

intended by the policy and provisions of 

the Investment Company Act.13 The 

Commission also has approved the 

standards of national securities 

exchanges, under which ETF shares are 

listed and traded.14

As discussed above, ETFs have 

become an increasingly popular 

investment vehicle over the last 26 

years. They also have become a popular 

trading tool, making up a significant 

portion of secondary market equities 

trading. During the first quarter of 2018, 

for example, trading in U.S.-listed ETFs 

made up approximately 18.75% of U.S. 

equity trading by share volume and 

28.2% of U.S. equity trading by dollar 

volume.15

Investors can buy and hold shares of 

ETFs (sometimes as a core component of 

a portfolio) or trade them frequently as 

part of an active trading or hedging 

strategy.16 ETF investors can sell ETF 

shares short, write options on them, and 

set market, limit, and stop-loss orders 

on them. Moreover, because certain 

costs are either absent in the ETF 

structure or are otherwise partially 

externalized, many ETFs have lower 

operating expenses than mutual 

funds.17 ETFs also may offer certain tax 

efficiencies compared to other pooled 

investment vehicles because 

redemptions from ETFs are often made 

in kind (that is, by delivering certain 

assets from the ETF’s portfolio, rather 

than in cash), thereby avoiding the need 

for the ETF to sell assets and potentially 

realize capital gains that are distributed 

to its shareholders. 

ETFs today provide investors with a 

diverse set of investment options. While 

the first ETFs held portfolios of 

securities that replicated the component 

securities of broad-based domestic stock 

market indexes, some ETFs now track 

more specialized indexes, including 

international equity indexes, fixedincome indexes, or indexes focused on 

particular industry sectors such as 

telecommunications or healthcare.18

Some ETFs seek to track highly 

customized or bespoke indexes, while 

others seek to provide a level of 

leveraged or inverse exposure to an 

index over a fixed period of time.19

Investors also have the ability to invest 

in ETFs that do not track a particular 

index and are actively managed.20

B. Operation of Exchange-Traded Funds 

An ETF issues shares that can be 

bought or sold throughout the day in the 

secondary market at a marketdetermined price. Like other investment 

companies, an ETF pools the assets of 

multiple investors and invests those 

assets according to its investment 

objective and principal investment 

strategies. Each share of an ETF 

represents an undivided interest in the 

underlying assets of the ETF. Similar to 

mutual funds, ETFs continuously offer 

their shares for sale. 

Unlike mutual funds, however, ETFs 

do not sell or redeem individual shares. 

Instead, ‘‘authorized participants’’ that 

have contractual arrangements with the 

ETF (or its distributor) purchase and 

redeem ETF shares directly from the 

ETF in blocks called ‘‘creation units.’’ 21

An authorized participant may act as a 

principal for its own account when 

purchasing or redeeming creation units 

from the ETF. Authorized participants 

also may act as agent for others, such as 

market makers, proprietary trading 

firms, hedge funds or other institutional 

investors, and receive fees for 

processing creation units on their 

behalf.22 Market makers, proprietary 

trading firms, and hedge funds provide 

additional liquidity to the ETF market 

through their trading activity. 

Institutional investors may engage in 

primary market transactions with an 

ETF through an authorized participant 

as a way to efficiently hedge a portion 

of their portfolio or balance sheet or to 


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23 Id. 

24An ETF may impose fees in connection with 

the purchase or redemption of creation units that 

are intended to defray operational processing and 

brokerage costs to prevent possible shareholder 

dilution (‘‘transaction fees’’). 

25The basket might not reflect a pro rata slice of 

an ETF’s portfolio holdings. Subject to the terms of 

the applicable exemptive relief, an ETF may 

substitute other securities or cash in the basket for 

some (or all) of the ETF’s portfolio holdings. 

Restrictions related to flexibility in baskets have 

varied over time. See infra section II.C.5. 

26An open-end fund is required by law to redeem 

its securities on demand from shareholders at a 

price approximating their proportionate share of the 

fund’s NAV at the time of redemption. See 15 

U.S.C. 80a–22(d). Title 17 CFR 270.22c–1 (‘‘rule 

22c–1’’) generally requires that funds calculate their 

NAV per share at least once daily Monday through 

Friday. See rule 22c–1(b)(1). Today, most funds 

calculate NAV per share as of the time the major 

U.S. stock exchanges close (typically at 4:00 p.m. 

Eastern Time). Under rule 22c–1, an investor who 

submits an order before the 4:00 p.m. pricing time 

receives that day’s price, and an investor who 

submits an order after the pricing time receives the 

next day’s price. See also 17 CFR 270.2a–4 (‘‘rule 

2a–4’’) (defining ‘‘current net asset value’’). 

27ETFs register offerings of shares under the 

Securities Act, and list their shares for trading 

under the Exchange Act. Depending on the facts 

and circumstances, authorized participants that 

purchase a creation unit and sell the shares may be 

deemed to be participants in a distribution, which 

could render them statutory underwriters and 

subject them to the prospectus delivery and liability 

provisions of the Securities Act. See 15 U.S.C. 

77b(a)(11) (defining the term ‘‘underwriter’’). 

28To date, the arbitrage mechanism has been 

dependent on daily portfolio transparency. 

29As part of this arbitrage process, authorized 

participants are likely to hedge their intraday risk. 

For example, when ETF shares are trading at a 

discount to an estimated intraday NAV per share of 

the ETF, an authorized participant may short the 

securities composing the ETF’s redemption basket. 

After the authorized participant returns a creation 

unit of ETF shares to the ETF in exchange for the 

ETF’s baskets, the authorized participant can then 

use the basket assets to cover its short positions. 

30Some studies have found the majority of all 

ETF-related trading activity takes place on the 

secondary market. See, e.g., Rochelle Antoniewicz 

& Jane Heinrichs, Understanding Exchange-Traded 

Funds: How ETFs Work, ICI Research Perspective 

20, No. 5 (Sept. 2014) (‘‘Antoniewicz’’), available at 

https://www.ici.org/pdf/per20-05.pdf, at 2 (‘‘On 

most trading days, the vast majority of ETFs do not 

have any primary market activity—that is, they do 

not create or redeem shares.’’). 

31Scott W. Barnhart & Stuart Rosenstein, 

Exchange-Traded Fund Introductions and ClosedEnd Fund Discounts and Volume, 45 The Financial 

Review 4 (Nov. 2010) (within a year of the 

introduction of a similar ETF, the average discount 

widens significantly and volume falls significantly 

in U.S. domestic equity, international equity, and 

U.S. bond closed-end funds, which may indicate 

that closed-end funds lose some desirability when 

a substitute ETF becomes available). As of 

December 31, 2017, total net assets of ETFs were 

$3.4 trillion compared to $275 billion for closedend funds. See 2018 ICI Fact Book, supra footnote 

3. 

32See Staff of the Office of Analytics and 

Research, Division of Trading and Markets, 

Research Note: Equity Market Volatility on August 

24, 2015 (Dec. 2015) (‘‘August 24 Staff Report’’), 

available at https://www.sec.gov/marketstructure/ 

research/equity_market_volatility.pdf (discussing 

spikes in ETF trading volume on August 24, 2015 

when U.S. equity markets experienced unusual 

price volatility). See also infra section II.B.2 

(discussing intraday deviations between market 

price and NAV as well as contemporaneous 

deviations between market price and the intraday 

value of the ETF’s portfolio). 

gain exposure to a strategy or asset 

class.23

An authorized participant that 

purchases a creation unit of ETF shares 

directly from the ETF deposits with the 

ETF a ‘‘basket’’ of securities and other 

assets identified by the ETF that day, 

and then receives the creation unit of 

ETF shares in return for those assets.24

The basket is generally representative of 

the ETF’s portfolio 25 and, together with 

a cash balancing amount, equal in value 

to the aggregate NAV of the ETF shares 

in the creation unit.26 After purchasing 

a creation unit, the authorized 

participant may hold the individual ETF 

shares, or sell some or all of them in 

secondary market transactions.27

Investors then purchase individual ETF 

shares in the secondary market. The 

redemption process is the reverse of the 

purchase process: The authorized 

participant redeems a creation unit of 

ETF shares for a basket of securities and 

other assets. 

The combination of the creation and 

redemption process with secondary 

market trading in ETF shares provides 

arbitrage opportunities that are designed 

to help keep the market price of ETF 

shares at or close to the NAV per share 

of the ETF.28 For example, if ETF shares 

are trading on national securities 

exchanges at a ‘‘discount’’ (a price 

below the NAV per share of the ETF), 

an authorized participant can purchase 

ETF shares in secondary market 

transactions and, after accumulating 

enough shares to compose a creation 

unit, redeem them from the ETF in 

exchange for the more valuable 

securities in the ETF’s redemption 

basket. The authorized participant’s 

purchase of an ETF’s shares on the 

secondary market, combined with the 

sale of the ETF’s basket assets, may 

create upward pressure on the price of 

the ETF shares, downward pressure on 

the price of the basket assets, or both, 

bringing the market price of ETF shares 

and the value of the ETF’s portfolio 

holdings closer together.29

Alternatively, if ETF shares are trading 

at a ‘‘premium’’ (a price above the NAV 

per share of the ETF), the transactions 

in the arbitrage process are reversed 

and, when arbitrage is working 

effectively, keep the market price of the 

ETF’s shares close to its NAV. 

Market participants also can engage in 

arbitrage activity without using the 

creation or redemption processes. For 

example, if a market participant believes 

that an ETF is overvalued relative to its 

underlying or reference assets (i.e., 

trading at a premium), the market 

participant may sell ETF shares short 

and buy the underlying or reference 

assets, wait for the trading prices to 

move toward parity, and then close out 

the positions in both the ETF shares and 

the underlying or reference assets to 

realize a profit from the relative 

movement of their trading prices. 

Similarly, a market participant could 

buy ETF shares and sell the underlying 

or reference assets short in an attempt 

to profit when an ETF’s shares are 

trading at a discount to the ETF’s 

underlying or reference assets. As with 

the creation and redemption process, 

the trading of an ETF’s shares and the 

ETF’s underlying or reference assets 

may bring the prices of the ETF’s shares 

and its portfolio assets closer together 

through market pressure.30

The arbitrage mechanism is important 

because it provides a means to maintain 

a close tie between market price and 

NAV per share of the ETF, thereby 

helping to ensure ETF investors are 

treated equitably when buying and 

selling fund shares. In granting relief 

under section 6(c) of the Act for ETFs 

to operate, the Commission has relied 

on this close tie between what retail 

investors pay (or receive) in the 

secondary market and the ETF’s 

approximate NAV to find that the 

required exemptions are necessary or 

appropriate in the public interest and 

consistent with the protection of 

investors and the purposes fairly 

intended by the policy and provisions of 

the Act. Investors also have come to 

expect that an ETF’s market price will 

maintain a close tie to the ETF’s NAV 

per share, which may lead some 

investors to view ETFs more favorably 

than similar closed-end funds.31 On the 

other hand, this expectation may lead 

investors to view ETFs as a less 

attractive investment option or cause 

them to sell ETF shares if market price 

and NAV per share diverge, particularly 

during periods of market stress.32

II. Discussion 

Given the growth in the ETF market, 

ETFs’ popularity among retail and 

institutional investors, and our long 

experience regulating this investment 

and trading vehicle, we believe that it is 

appropriate to propose a rule that would 

allow most ETFs to operate without first 

obtaining an exemptive order from the 

Commission under the Act. We believe 

that such a rule would create a 

consistent, transparent and efficient 

regulatory framework for the regulation 

of most ETFs and level the playing field 

for these market participants. Proposed 


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33See proposed rule 6c–11(a) (defining 

‘‘exchange-traded fund’’). Under the proposed rule, 

the term ‘‘basket’’ would be defined to mean the 

securities, assets, or other positions in exchange for 

which an ETF issues (or in return for which it 

redeems) creation units. The term ‘‘exchange-traded 

fund’’ thus would include ETFs that transact on an 

in-kind basis, on a cash basis, or both. 

34See, e.g., SPDR Trust, Series 1, Investment 

Company Act Release Nos. 18959 (Sept. 17, 1992) 

[57 FR 43996 (Sept. 23, 1992)] (notice) and 19055 

(Oct. 26, 1992) (order) and related application 

(‘‘SPDR’’). 

35As of Dec. 31, 2017, for example, the eight 

existing UIT ETFs had total assets of approximately 

$379 billion, representing approximately 11.3% of 

total assets invested in ETFs (based on data 

obtained from MIDAS, Bloomberg, and Morningstar 

Direct). 

36See section 4(2) of the Act [15 U.S.C. 80a–4]. 

A UIT has a fixed life—a termination date for the 

trust is established when the trust is created. 

37The exemptive relief granted to UIT ETFs does 

not provide relief from the portion of section 4(2) 

that requires that UIT securities represent an 

undivided interest in a unit of specified securities. 

Because a UIT must invest in ‘‘specified securities,’’ 

the investment strategies that a UIT ETF can pursue 

are limited. All UIT ETFs today seek to track the 

performance of an index by investing in the 

component securities of the index in the same 

approximate proportions as in the index (i.e., 

‘‘replicating’’ the index). The trustee of an UIT ETF 

may make adjustments to the ETF’s portfolio only 

to reflect changes in the composition of the 

underlying index. See Actively Managed ExchangeTraded Funds, Investment Company Act Release 

No. 25258 (Nov. 8. 2001) [66 FR 57614 (Nov. 15, 

2001)] (‘‘2001 Concept Release’’), at n.11. 

38An ETF that uses a sampling strategy includes 

assets in its portfolio that are designed, in the 

aggregate, to reflect the underlying index’s 

capitalization, industry, and fundamental 

investment characteristics, and to perform like the 

index. The ETF implements the strategy by 

acquiring a subset of the underlying index’s 

component securities and may invest a portion of 

the ETF’s portfolio in securities and other financial 

instruments (including derivatives) that are not 

included in the corresponding index if the adviser 

believes the investment will help the ETF track the 

underlying index. See 2008 ETF Proposing Release, 

supra footnote 3. 

39UIT dividends are held in a non-interest 

bearing account and paid out quarterly. The 

inability to reinvest dividends can have a cash drag 

on the tracking performance of a UIT ETF. See A. 

Seddik Meziani, Exchange-Traded Funds: 

Investment Practices and Tactical Approaches 

(2016), at 22. 

40See Use of Derivatives by Registered 

Investment Companies and Business Development 

Companies, Investment Company Act Release No. 

31933 (Dec. 11, 2015) [80 FR 80883 (Dec. 28, 2015)] 

(‘‘Derivatives Proposing Release’’), at n.139. 

41The Commission has received applications for 

ETFs structured as a UIT, but with features that are 

different from typical UIT-structured ETFs. See 

Application of Elkhorn Securities, LLC and Elkhorn 

Unit Trust (Mar. 6, 2017) (‘‘Elkhorn Application’’); 

Application of Precidian ADRs LLC (Aug. 1, 2014) 

(‘‘Precidian ADR Application’’). The Commission 

has not taken any action on the Elkhorn 

Application, and the Precidian ADR Application 

was withdrawn by the applicant. Two orders 

modifying relief for existing ETFs organized as UITs 

were issued in 2007. See NASDAQ–100 Trust, 

Series 1, et al., Investment Company Act Release 

Nos. 27740 (Feb. 27, 2007) [72 FR 9594 (Mar. 2, 

2007)] (notice) and 27753 (Mar. 20, 2007) (order) 

and related application; BLDRS Index Funds Trust, 

et al., Investment Company Act Release Nos. 27745 

(Feb. 28, 2007) [72 FR 9787 (Mar. 5, 2007)] (notice) 

and 27768 (Mar. 21, 2007) (order) and related 

application. 

42See 2008 ETF Proposing Release, supra 

footnote 3, at text accompanying nn.63–67 (noting 

that the Commission had not received an exemptive 

application for a new ETF to be organized as a UIT 

since 2002 and, as a result, there did not appear to 

be a need to include UIT relief in the proposed 

rule). 

43See Comment Letter of Xshares Advisors LLC 

(May 20, 2008) (‘‘Xshares 2008 Comment Letter’’); 

Comment Letter of the Investment Company 

Institute (May 19, 2008) (‘‘ICI 2008 Comment 

Letter’’). 

44See Comment Letter of Katten Muchin 

Rosenman LLP (May 30, 2008) (‘‘Katten 2008 

Comment Letter’’); Comment Letter of the Federal 

Regulation of Securities Committee, Section of 

Business Law, American Bar Association (May 29, 

2008) (‘‘ABA 2008 Comment Letter’’). 

45See Comment Letter of State Street Global 

Advisors (May 19, 2008) (‘‘SSgA 2008 Comment 

Letter’’); Comment Letter of NYSE Arca (May 29, 

2008) (‘‘NYSE Arca 2008 Comment Letter’’); Katten 

2008 Comment Letter. 

rule 6c–11 includes several conditions 

designed to address the concerns 

underlying the relevant statutory 

provisions and to support a Commission 

finding that the exemptions necessary to 

allow ETFs to operate are in the public 

interest and consistent with the 

protection of investors and the purposes 

fairly intended by the policy and 

provisions of the Act. The proposed 

conditions are based upon the existing 

exemptive relief for ETFs, which we 

believe have served to support an 

efficient arbitrage mechanism, but 

reflect several modifications based on 

our experience regulating this product. 

A. Scope of Proposed Rule 6c–11 

Proposed rule 6c–11 would define an 

ETF as a registered open-end 

management investment company that: 

(i) Issues (and redeems) creation units to 

(and from) authorized participants in 

exchange for a basket and a cash 

balancing amount (if any); and (ii) 

issues shares that are listed on a 

national securities exchange and traded 

at market-determined prices.33

1. Organization as Open-End Funds 

Proposed rule 6c–11 would be 

available only to ETFs that are 

organized as open-end funds. The vast 

majority of ETFs currently in operation 

are organized as open-end funds, 

although the earliest ETFs were 

organized as UITs (‘‘UIT ETFs’’).34

These early UIT ETFs represent a 

significant amount of assets within the 

ETF industry.35 For example, two of the 

largest ETFs by total net assets and 

estimated dollar trading volume (SPDR 

S&P 500 ETF Trust (SPY) and 

PowerShares QQQ Trust, Series 1 

(QQQ)) are organized as UITs. 

A UIT is an investment company 

organized under a trust indenture or 

similar instrument that issues 

redeemable securities, each of which 

represents an undivided interest in a 

unit of specified securities.36 By statute, 

a UIT is unmanaged and its portfolio is 

fixed. Substitution of securities may 

take place only under certain predefined circumstances.37 A UIT does 

not have a board of directors, corporate 

officers, or an investment adviser to 

render advice during the life of the trust. 

By contrast, ETFs organized as open-end 

funds are managed by investment 

advisers and, in addition to replicating 

an index, can be actively managed or 

use a ‘‘sampling’’ strategy to track an 

index.38 Unlike an ETF structured as a 

UIT, an open-end fund ETF may 

participate in securities lending 

programs and has greater flexibility to 

reinvest dividends from portfolio 

securities.39 ETFs structured as openend funds also may invest in 

derivatives, which typically require a 

degree of management that is not 

provided for in the UIT structure.40 As 

a result, we understand that most ETF 

sponsors now prefer the open-end fund 

structure over the UIT structure given 

the increased investment flexibility the 

open-end structure affords. Indeed, we 

have received very few exemptive 

applications for new UIT ETFs since 

2002 and no new UIT ETFs have come 

to market in that time.41

The rule we proposed in 2008 would 

not have included UIT ETFs within its 

scope.42 Comments on the 2008 ETF 

Proposing Release were mixed with 

regard to providing relief to UITs, with 

two commenters supporting the 

exclusion of UITs.43 On the other hand, 

two commenters argued that the 

Commission should expand the rule to 

include UITs, contending that sponsors 

in the future may choose the UIT 

structure for some reason unforeseen 

today.44 Some commenters also stated 

that existing UIT ETFs should be able to 

rely on the rule, which may provide 

broader relief than provided by their 

exemptive orders.45

While we acknowledge that excluding 

UIT ETFs would result in a segment of 

ETF assets that are outside the 

regulatory framework of proposed rule 

6c–11, we do not believe there is a need 

to include ETF UITs within the scope of 

the proposed rule given the limited 

sponsor interest in developing ETFs 

organized as UITs. In addition, even if 

we were to include UIT ETFs within the 

scope of the rule, we believe that the 

unmanaged nature of the UIT structure 

would require conditions that differ 

from the conditions applicable to ETFs 


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46See, e.g., SPDR, supra footnote 34. 

47See id. 

48See id. (permitting baskets accepted by UIT 

ETF for purchases of creation units to include the 

cash equivalent of a component security of the 

underlying index only where: (i) The trustee 

determines that the index security is likely to be 

unavailable or available in insufficient quantity; or 

(ii) a particular investor is restricted from investing 

or transacting in such index security). 

49See infra section II.C.5. 

50Unlike the exemptive relief we have granted to 

certain ETFs organized as open-end funds (see 

supra footnote 6), the relief we have granted to 

ETFs organized as UITs does not provide relief for 

future ETFs formed pursuant to the same order. 

51See, e.g., SPDR, supra footnote 34. 

52Section 26(a)(2)(C) of the Act requires that the 

trust indenture for a UIT prohibit payments to the 

depositor or to any affiliated person thereof, except 

payments for performing bookkeeping and other 

administrative services of a character normally 

performed by the trustee or custodian itself. 15 

U.S.C. 80a–26(a)(2)(C). 

53See, e.g., NASDAQ–100 Trust, Series 1, 

Investment Company Act Release Nos. 23668 (Jan. 

27, 1999) [64 FR 5082 (Feb. 2, 1999)] (notice) and 

23702 (Feb. 22, 1999) (order) and related 

application (exemption from section 26(a)(2)(C) to 

permit UIT to reimburse the sponsor up to a 

maximum of 20 basis points) (‘‘NASDAQ 100’’); 

Midcap SPDR Trust, Series 1, Investment Company 

Act Release Nos. 20797 (Dec. 23, 1994) [60 FR 163 

(Jan. 3, 1995)] (notice) and 20844 (Jan. 18, 1995) 

(order) and related application (30 basis points). 

54While we do not propose to include ETFs 

organized as UITs within the scope of proposed rule 

6c–11, we are proposing amendments to Form N– 

8B–2 to require them to provide certain additional 

disclosures regarding trading costs. See infra 

section II.I. 

55See NASDAQ 100, supra footnote 53. 

56Eligible trust securities under rule 14a–3 

include corporate debt securities (including 

nonconvertible preferred stock), government and 

municipal securities, and units of a previously 

issued series of a UIT. The term does not include 

equity securities. See rule 14a–3(b). 

organized as open-end funds, requiring 

a regulatory framework that would be 

different than our proposed structure for 

open-end ETFs. The exemptive relief 

that has been granted to UIT ETFs, for 

example, provides that the trustee will 

make adjustments to the ETF’s portfolio 

only pursuant to the specifications set 

forth in the trust formation documents 

in order to track changes in the ETF’s 

underlying indexes.46 The trustee does 

not have discretion when making these 

portfolio adjustments.47 In most cases, 

therefore, a UIT ETF uses baskets that 

correspond pro rata to the ETF’s 

portfolio holdings.48 The rule we are 

proposing would allow ETFs the 

flexibility to use baskets that differ from 

a pro rata representation of the ETF’s 

portfolio if certain conditions are met.49

Because the conditions we are 

proposing related to basket flexibility 

require ongoing management and board 

oversight, we do not believe that 

extending such basket flexibility to UIT 

ETFs would be appropriate given the 

unmanaged nature of a UIT. 

Instead, we believe that UIT ETFs 

should continue to operate pursuant to 

their exemptive orders, which include 

terms and conditions that are 

appropriately tailored to address the 

unique features of a UIT.50 The 

exemptive relief granted to UIT ETFs 

includes relief from sections of the Act 

that govern key aspects of a UIT’s 

operations.51 For example, because UITs 

are prohibited from paying fees beyond 

those necessary to cover the costs of 

administrative and bookkeeping 

services, UIT ETFs require exemptive 

relief from section 26(a)(2)(C) of the Act 

to allow the ETF to pay certain 

enumerated expenses.52 However, 

because UITs are unmanaged and are 

not overseen by boards, the exemptive 

order for each UIT ETF contains its own 

list of permissible capped expenses that 

vary among the different UIT ETFs.53

To the extent that ETF sponsors 

develop unforeseen, novel UIT ETFs, we 

believe that the Commission should 

review such products as part of its 

exemptive process to determine whether 

the relief is necessary or appropriate in 

the public interest and consistent with 

the protection of investors. We therefore 

are not proposing to include ETFs 

structured as UITs within the scope of 

proposed rule 6c–11.54

We request comment on whether 

proposed rule 6c–11 should be available 

only to ETFs structured as open-end 

funds. 

• Should the rule provide exemptive 

relief for both ETFs organized as openend funds and ETFs organized as UITs? 

Are we correct that ETF sponsors will 

likely prefer the open-end structure to 

the UIT structure when forming ETFs in 

the future? If not, why? 

• If UIT ETFs were included in the 

scope of the proposed rule, should they 

be subject to the same proposed 

conditions or should we tailor particular 

conditions in light of the unmanaged 

nature of a UIT? For example, how 

should the proposed rule address basket 

composition for UIT ETFs? Should UIT 

ETFs only be permitted to replicate their 

index, or should we allow them to 

engage in representative sampling on a 

pro rata basis? Should a UIT ETF only 

be permitted to substitute cash (instead 

of other securities) for particular basket 

assets? Should we allow a UIT ETF to 

substitute basket assets only in certain 

enumerated circumstances (e.g., only 

when the basket asset is not eligible for 

trading by an authorized participant or 

is not available in sufficient quantity for 

delivery to or from the authorized 

participant)? 

• If UIT ETFs were included within 

the scope of the rule, should we 

expressly limit the types of indexes that 

such ETFs may track given the 

unmanaged nature of the UIT structure 

and the potential for specialized or 

bespoke indexes to be inconsistent with 

a fixed portfolio? For example, should 

we provide that ETFs structured as UITs 

may only track broad-based securities 

indexes? Should we limit the 

derivatives holdings of UIT ETFs or 

restrict them from tracking indexes that 

include certain types of derivatives? If 

so, what types of derivatives should be 

permitted? 

• If we were to include UIT ETFs 

within the scope of rule 6c–11, should 

we provide an exemption from section 

26(a)(2)(C), consistent with our 

exemptive orders, to permit the 

payment of certain expenses associated 

with the creation and maintenance of 

the ETF? If so, should we limit the 

amount of expenses that may be 

reimbursed? What should the limit be, 

and why? Should we limit the 

reimbursement to no more than 20 basis 

points of the ETF’s NAV per share on 

an annualized basis, consistent with 

some of the exemptive orders granted to 

UIT ETFs? Should this limit be higher 

(e.g., 30 basis points) or lower (e.g., 10 

basis points)? Should the rule 

enumerate the expenses that may be 

reimbursed? For example, should the 

rule permit the reimbursement of any or 

all of the following: (i) Annual index 

licensing fees; (ii) annual federal and 

state fees for the registration of newly 

issued creation units; and (iii) expenses 

of the sponsor relating to the 

development, printing, and distribution 

of marketing materials? Are there other 

expenses that should be permissible 

reimbursements under such an 

exemption? 

• Our exemptive orders for UIT ETFs 

also include relief from section 14(a) of 

the Act, which provides that no 

registered investment company may 

make an initial public offering of its 

securities unless it has a net worth of at 

least $100,000 or is assured, via private 

subscriptions, of issuing at least 

$100,000 in securities in the offering.55

If UIT ETFs were included within the 

scope of the rule, would they need relief 

from section 14(a) of the Act consistent 

with our prior exemptive relief? If so, 

what conditions should we consider as 

part of the rule? Alternatively, should 

we consider amending rule 14a–3 under 

the Act, which provides an exemption 

from section 14(a) for UITs that invest 

in ‘‘eligible trust securities?’’ 56 If so, 

how should we define ‘‘eligible trust 

securities’’? For example, should equity 

securities be added to the definition of 

‘‘eligible trust securities’’? Should we 


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57FLexible EXchange options (‘‘FLEX options’’) 

are a type of customized equity or index option 

contracts. Some traditional UITs have exemptive 

relief from section 14(a) to invest in FLEX options 

with expiration dates that coincide with UIT’s 

maturity date. See e.g., Olden Lane Securities LLC, 

et al., Investment Company Act Release Nos. 32589 

(April 3, 2017) [82 FR 17048 (April 7, 2017)] 

(notice) and 32619 (May 1, 2017) (order) and related 

application. 

58See, e.g., WisdomTree Trust, et al., Investment 

Company Act Release Nos. 28147 (Feb. 6, 2008) [73 

FR 7776 (Feb. 11, 2008)] (notice) and 28174 (Feb. 

27, 2008) (order) and related application (‘‘2008 

WisdomTree Trust’’); Barclays Global Fund 

Advisors, et al., Investment Company Act Release 

Nos. 28146 (Feb. 6, 2008) [73 FR 7771 (Feb. 11, 

2008)] (notice) and 28173 (Feb. 27, 2008) (order) 

and related application (‘‘Barclays Global 2008’’). 

Approximately 100 exemptive orders have been 

issued since 2008 for actively managed, transparent 

ETFs. 

59See 2001 Concept Release, supra footnote 37, 

at n.31 and accompanying and following text. 

Comment letters to the 2001 Concept Release are 

available at http://www.sec.gov/rules/concept/ 

s72001.shtml. 

60See 2008 ETF Proposing Release, supra 

footnote 3, at section III.A.2. 

61See e.g., Comment Letter of the Vanguard 

Group, Inc. (June 19, 2008) (‘‘Vanguard 2008 

Comment Letter’’); Xshares 2008 Comment Letter; 

Comment Letter of Barclays Global Fund Advisors 

(May 16, 2008) (‘‘BGFA 2008 Comment Letter’’); ICI 

2008 Comment Letter; SSgA 2008 Comment Letter; 

Comment Letter of Mutual Fund Directors Forum 

(May 21, 2008). 

62See Comment Letter of Brown & Associates LLC 

(May 19, 2008); Katten 2008 Comment Letter. 

63These estimates are based on data obtained 

from MIDAS, Bloomberg and Morningstar Direct as 

of December 31, 2017. 

64See infra section II.B.2. 

65See, e.g., John Waggoner, Smart-beta ETFs Take 

in Billions in New Assets, Investment News (Oct. 

11, 2017), available at http://

www.investmentnews.com/article/20171011/FREE/ 

171019982/smart-beta-etfs-take-in-billions-in-newassets); Brendan Conway, New Trend: The 

‘‘Bespoke’’ ETF, Barron’s (Jan. 17, 2014), available 

at http://www.barrons.com/articles/new-trend-theaposbespokeapos-etf-1389970766. 

66All ETFs that could rely on the proposed rule 

currently provide full portfolio transparency as a 

matter of market practice, although only actively 

managed ETFs and some index-based ETFs with 

affiliated index providers are required to do so 

pursuant to their exemptive orders. See infra 

section II.C.4. See also, e.g., Guggenheim Funds 

Investment Advisors, LLC, et al., Investment 

Company Act Release Nos. 30560 (June 14, 2013) 

[78 FR 37614 (June 21, 2013)] (notice) and 30598 

(July 10, 2013) (order) and related application. 

Earlier relief granted to ETFs with affiliated index 

providers did not require full portfolio 

transparency, but included conditions that were 

intended to address potential conflicts of interest. 

See, e.g., HealthShares Inc., et al., Investment 

Company Act Release Nos. 27916 (July 27, 2007) 

[72 FR 42447 (Aug. 2, 2007)] (notice) and 27930 

(Aug. 20, 2007) (order) and related application; 

WisdomTree Investments, Inc., et al., Investment 

Company Act Release Nos. 27324 (May 18, 2006) 

[71 FR 29995 (May 24, 2006)] (notice) and 27391 

(June 12, 2006) (order) and related application 

(‘‘2006 WisdomTree Investments’’). 

67For these purposes, an index-based ETF was 

defined as an ETF that has a stated investment 

objective of obtaining returns that correspond to the 

returns of a securities index (whose provider 

discloses on its internet website the identities and 

weightings of the component securities and other 

assets of that index). See 2008 ETF Proposing 

Release, supra footnote 3. See also infra section 

II.C.4 (discussing proposed condition regarding 

portfolio transparency). 

68See 2015 ETP Request for Comment, supra 

footnote 9. 

include other types of securities within 

that definition? For example, should we 

include FLEX options within the 

definition? 57

• Are there any other exemptions we 

should consider for UIT ETFs? 

• If we were to include UIT ETFs in 

rule 6c–11, are there any specific 

disclosures that should be required, 

other than the ones proposed herein? 

• If we do not include UIT ETFs 

within the scope of the rule, should we 

nonetheless require them to comply 

with any of the rule’s requirements for 

ETFs organized as open-end funds? 

2. Index-Based ETFs and Actively 

Managed ETFs 

Proposed rule 6c–11 would provide 

exemptions for both index-based ETFs 

and actively managed ETFs, but would 

not by its terms establish different 

requirements based on whether an 

ETF’s investment objective is to seek 

returns that correspond to the returns of 

an index. We believe that index-based 

and actively managed ETFs that comply 

with the proposed rule’s conditions 

function similarly with respect to 

operational matters, despite different 

investment objectives or strategies, and 

do not present significantly different 

concerns under the provisions of the 

Act from which the proposed rule grants 

relief. For example, both index-based 

and actively managed ETFs register 

under the Act, issue and redeem shares 

in creation unit sizes in exchange for 

baskets of assets, list on national 

securities exchanges, and allow 

investors to trade ETF shares throughout 

the day at market-determined prices in 

the secondary market. 

The distinction between index-based 

ETFs and actively managed ETFs in our 

current exemptive orders is largely a 

product of ETFs’ historical evolution. 

The Commission did not approve the 

first actively managed ETF until nearly 

15 years after index-based ETFs were 

introduced.58 As discussed in a 2001 

concept release on actively managed 

ETFs, the Commission was initially 

concerned that actively managed ETFs 

would not be able (or willing) to provide 

portfolio transparency, potentially 

hindering the arbitrage mechanism 

deemed critical to the operation of an 

ETF.59 Actively managed ETFs were 

novel at the time of the 2008 ETF 

Proposing Release, and the Commission 

solicited comment on whether a 

proposed ETF rule should specifically 

include actively managed ETFs.60 Six 

commenters supported this approach,61

while a few commenters questioned 

whether it was premature to allow 

actively managed ETFs to operate using 

the rule.62

The actively managed ETF market has 

grown considerably since 2008. There 

are now over 200 actively managed 

ETFs with approximately $45.8 billion 

in assets.63 The Commission has 

observed how actively managed ETFs 

operate during this time, and has not 

identified any operational issues that 

suggest additional conditions for 

actively managed ETFs are warranted. 

As noted below, we believe that the 

arbitrage mechanism for existing 

actively managed ETFs has worked 

effectively with small deviations 

between market price and NAV per 

share.64

We believe that permitting indexbased and actively managed open-end 

ETFs to operate under the proposed rule 

subject to the same conditions would 

provide a level playing field among 

those market participants. Furthermore, 

we believe that it would be 

unreasonable to create a meaningful 

distinction within the rule between 

index-based and actively managed ETFs 

given the evolution of indexes over the 

last decade. The proliferation of highly 

customized, often methodologically 

complicated, indexes has blurred the 

distinction between such products.65 At 

the same time, ETF industry practices in 

areas such as portfolio transparency 

have converged between these types of 

funds.66 We therefore believe that 

eliminating the regulatory distinction 

between index-based ETFs and actively 

managed ETFs would help to provide a 

more consistent and transparent 

regulatory framework for ETFs 

organized as open-end funds. This 

approach also would be consistent with 

our regulation of other types of openend funds, which does not distinguish 

between actively managed and indexbased strategies. 

The rule we proposed in 2008 

similarly would not have distinguished 

between index-based ETFs and actively 

managed ETFs, except in one respect— 

it would have permitted an index-based 

ETF to disclose daily the composition of 

its index in lieu of disclosing its 

portfolio holdings.67 However, we 

believe that distinguishing between 

index-based ETFs and actively managed 

ETFs in this manner is no longer 

necessary given that all ETFs that could 

rely on the proposed rule currently 

provide full portfolio transparency.68

We request comment on whether 

proposed rule 6c–11 should provide 


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69There are some variations in this representation 

for index-based funds that invest in fixed-income 

securities and foreign securities. See, e.g., Destra 

Exchange-Traded Fund Trust, et al., Investment 

Company Act Release Nos. 33048 (Mar. 14, 2018) 

[83 FR 12208 (Mar. 20, 2018)] (notice) and 33071 

(Apr. 10, 2018) (order) and related application 

(‘‘Each Fund . . . will invest at least 80% of its 

assets, exclusive of collateral held from securities 

lending, in Component Securities of its respective 

Underlying Index, or in the case of Fixed Income 

Funds, in the Component Securities of its 

respective Underlying Index and [to-be-announced 

transactions] representing Component Securities, 

and in the case of Foreign Funds, in Component 

Securities and depositary receipts representing 

foreign securities such as [American Depositary 

Receipts and Global Depositary Receipts] 

representing such Component Securities (or, in the 

case of Foreign Funds tracking Underlying Indexes 

for which Depositary Receipts are themselves 

Component Securities, underlying stocks in respect 

of such Depositary Receipts.’’) (internal footnotes 

omitted). 

70We use the term ‘‘leveraged ETFs’’ in this 

release to refer to ETFs that pursue leveraged 

strategies (i.e., those that seek to provide returns 

that exceed the performance of a market index by 

a specified multiple over a period of time) and 

inverse strategies (i.e., those that seek to provide 

returns that have an inverse relationship to, or 

provide returns that are an inverse multiple of, the 

performance of a market index over a fixed period 

of time). At the end of December 2017, 187 ETFs 

employed leveraged or inverse investment 

strategies. All of these ETFs are structured as openend funds. In total, these ETFs had total net assets 

of $35.26 billion or approximately 1% of all ETF 

assets. See infra footnote 427 and following text. 

71See proposed rule 6c–11(c)(4); see also Item 

C.3.c. of Form N–CEN (requiring funds to identify 

if they seek to achieve performance results that are 

a multiple of an index or other benchmark, the 

inverse of an index or other benchmark, or a 

multiple of the inverse of an index or other 

benchmark). 

72See ETF Handbook, supra footnote 22, at 266. 

73For example, as a result of compounding, 

leveraged ETFs can outperform a simple multiple 

of its index’s returns over several days of 

consistently positive returns, or underperform a 

simple multiple of its index’s returns over several 

days of volatile returns. 

74See Office of Investor Education and Advocacy, 

SEC, Leveraged and Inverse ETFs: Specialized 

Products with Extra Risks for Buy-and-Hold 

Investors Investor Alert and Bulletins (Aug. 1, 

2009), available at http://www.sec.gov/investor/ 

pubs/leveragedetfs-alert.htm; FINRA, NonTraditional ETFs: FINRA Reminds Firms of Sales 

Practice Obligations Relating to Leveraged and 

Inverse Exchange-Traded Funds, Regulatory Notice 

09–31 (June 2009), available at http://

www.finra.org/sites/default/files/NoticeDocument/ 

p118952.pdf (‘‘FINRA Regulatory Notice 09–31’’) 

(providing an example of a four-month period 

where a specified index gained 2%, while an ETF 

seeking to deliver twice the daily return of that 

index fell 6%, and the related ETF seeking to 

deliver twice the inverse of the index’s daily return 

fell 26%). 

75See FINRA Regulatory Notice 09–31, supra 

footnote 74 (‘‘Using a two-day example, if the index 

goes from 100 to close at 101 on the first day and 

back down to close at 100 on the next day, the twoday return of an inverse ETF will be different than 

if the index had moved up to close at 110 the first 

day but then back down to close at 100 on the next 

day. In the first case with low volatility, the inverse 

ETF loses 0.02 percent; but in the more volatile 

scenario the inverse ETF loses 1.82 percent. The 

effects of mathematical compounding can grow 

significantly over time, leading to scenarios such as 

those noted above.’’). 

76See id. (reminding member firms of their sales 

practice obligations relating to leveraged ETFs and 

noting that leveraged ETFs are typically not suitable 

for retail investors who plan to hold these products 

for more than one trading session). See also, e.g., 

SEC v. Hallas, No. 1:17-cv-2999 (S.D.N.Y. Sept. 27, 

2017); FINRA News Release, FINRA Sanctions 

Oppenheimer & Co. $2.9 Million for Unsuitable 

Sales of Non-Traditional ETFs and Related 

Supervisory Failures (June 8, 2016), available at 

http://www.finra.org/newsroom/2016/finrasanctions-oppenheimer-co-29-million-unsuitablesales-non-traditional-etfs. The Commission also 

settled an enforcement action against an investment 

adviser under section 206(4) of the Investment 

Advisers Act of 1940 (the ‘‘Advisers Act’’) and rule 

206(4)–7, finding the adviser violated these 

provisions by failing to adequately implement 

written compliance policies that were designed to 

ensure that recommendations of single inverse ETFs 

to non-discretionary advisory clients were suitable 

for each individual client. See In Re Morgan Stanley 

Smith Barney, LLC, Investment Advisers Act 

Release No. 4649 (Feb. 14, 2017) (settled action), 

available at https://www.sec.gov/litigation/admin/ 

2017/ia-4649.pdf. 

77The staff has not supported new exemptive 

relief for leveraged ETFs since 2009. The orders 

issued to current leveraged ETF sponsors prior to 

the staff moratorium, as amended over time, relate 

to leveraged ETFs that seek investment results of up 

to 300% of the return (or inverse of the return) of 

the underlying index. Rydex ETF Trust, et al., 

Investment Company Act Release Nos. 27703 (Feb. 

20, 2007) [72 FR 8810 (Feb. 27, 2007)] (notice) and 

27754 (Mar. 20, 2007) (order) and related 

application; Rafferty Asset Management, LLC, et al., 

Investment Company Act Release Nos. 28379 (Sept. 

12, 2008) [73 FR 54179 (Sept. 18, 2008)] (notice) 

and 28434 (Oct. 6, 2008) (order) and related 

application. See also ProShares Trust, et al., 

Investment Company Act Release Nos. 28696 (Apr. 

14, 2009) [74 FR 18265 Apr. 21, 2009)] (notice) and 

28724 (May 12, 2009) (order) and related 

application (amending the applicant’s prior order) 

(‘‘ProShares’’); Rafferty Asset Management, LLC, et 

al., Investment Company Act Release Nos. 28889 

(Aug. 27, 2009) [74 FR 45495 (Sept. 2, 2009)] 

(notice) and 28905 (Sept. 22, 2009) (order) and 

related application (amending the applicant’s prior 

order) (‘‘Rafferty’’). 

exemptions to index-based ETFs and 

actively managed ETFs subject to the 

same conditions. 

• Should the rule maintain the 

historical distinction between indexbased ETFs and actively managed ETFs? 

Do investors find this distinction 

meaningful? 

• If the rule maintains the distinction, 

what conditions of the rule should differ 

between index-based and actively 

managed ETFs? For example, some 

applications for index-based ETFs 

include a representation that the ETF 

will invest at least 80% of its assets, 

exclusive of collateral held from 

securities lending, in the component 

securities of its underlying index.69

Should the rule include a similar 

condition? 

• Should the proposed rule include 

requirements relating to index-based 

ETFs with an affiliated index provider? 

If so, what requirements and why? For 

example, should ETFs with affiliated 

index providers be required to adopt 

additional policies and procedures 

designed to further limit information 

sharing between portfolio management 

staff and index management staff? How 

should we define ‘‘index provider’’ for 

these purposes? 

• Are there operational differences 

between index-based and actively 

managed ETFs that should be addressed 

in the proposed rule? 

3. Leveraged ETFs 

Although the proposed rule would 

not distinguish between actively 

managed ETFs and index-based ETFs in 

general, it would take a different 

approach with respect to leveraged 

ETFs, which are a type of index-based 

ETF that presents unique 

considerations.70 ‘‘Leveraged ETFs’’ 

refers to ETFs that seek, directly or 

indirectly, to provide returns that 

exceed the performance of a market 

index by a specified multiple or to 

provide returns that have an inverse 

relationship to the performance of a 

market index, over a fixed period of 

time.71 A leveraged ETF seeks to 

amplify the returns of its underlying 

index or to profit from a decline in the 

value of its underlying index. It also 

typically seeks to deliver the targeted 

return over a short period of time, such 

as a day. This means that investors 

holding shares over periods longer than 

the targeted period may experience 

performance that is different, and at 

times substantially different, from the 

targeted returns. Leveraged ETFs seek to 

achieve their targeted returns by using 

financial derivatives. These funds are 

sometimes referred to as trading tools 

because they can be used by investors 

to hedge against or profit from shortterm market movements without using 

margin.72

The strategy that leveraged ETFs 

pursue requires them to rebalance their 

portfolios on a daily basis in order to 

maintain a constant leverage ratio. This 

daily reset, and the effects of 

compounding,73 can result in 

performance that differs significantly 

from some investors’ expectations of 

how index investing generally works.74

This effect can be more pronounced in 

volatile markets.75 As a result, buy-andhold investors in a leveraged ETF with 

an intermediate or long-term time 

horizon—who may not evaluate their 

portfolios frequently—may experience 

large and unexpected losses.76

Leveraged ETFs, and their use of 

derivatives, also may raise issues under 

section 18 that we are evaluating as part 

of our broader consideration of the use 

of derivatives by registered funds and 

business development companies.77 In 


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78See Derivatives Proposing Release, supra 

footnote 40. Section 18 of the Act limits a fund’s 

ability to obtain leverage or issue senior securities. 

15 U.S.C. 80a–18. 

79See supra footnote 77. As discussed in more 

detail in section II.G below, we are not proposing 

here to rescind the existing leverage ETF orders. 

Existing leveraged ETF sponsors would continue to 

operate under their exemptive orders. Existing 

leveraged ETFs, however, would be subject to the 

proposed amendments to Form N–1A discussed 

below. 

80Proposed rule 6c–11(c)(4). 

81The current exemptive orders that allow 

leveraged ETFs contemplate a daily reset, because 

the orders relate to ETFs that pursue daily 

investment objectives. See supra footnote 77. For 

example, one application describes its leveraged 

ETFs as ‘‘seek[ing] to provide daily investment 

results, before fees and expenses, that correspond 

to 300% of the daily performance, or 300% of the 

inverse (opposite) daily performance, of its 

Underlying Index.’’ See Rafferty, supra footnote 77. 

Another describes its leveraged ETFs as 

‘‘attempt[ing], on a daily basis, to achieve its 

investment objective by corresponding to a 

specified multiple of the performance (either 125%, 

150% or 200%), or the inverse performance, or the 

inverse multiple (either 125%, 150% or 200% of 

the opposite) of the performance of a particular 

securities index.’’ See ProShares, supra footnote 77. 

82Similarly, an ‘‘inverse ETF’’ includes both 

inverse strategies (i.e., ¥100% of an index’s 

performance) and leveraged inverse strategies (e.g., 

¥125% or ¥200% of an index’s performance). 

83See supra footnote 81. 

84See, e.g., NASD, Structured Products: NASD 

Provides Guidance Concerning the Sale of 

Structured Products, Notice to Members (September 

2005), available at http://www.complinet.com/file_

store/pdf/rulebooks/nasd_0559ntm.pdf; see also 

FINRA, Complex Products: Heightened Supervision 

of Complex Products, Regulatory Notice 12–03 

(January 2012), available at http://www.finra.org/ 

sites/default/files/NoticeDocument/p125397.pdf. 

2015, for example, we proposed new 17 

CFR 270.18f–4 (‘‘rule 18f–4’’ under the 

Act). Proposed rule 18f–4 was designed 

to address the investor protection 

purposes and concerns underlying 

section 18 of the Act and to provide an 

updated and more comprehensive 

approach to the regulation of funds’ use 

of derivatives transactions.78

In light of our ongoing consideration, 

including the potential staff 

recommendation of a re-proposal on 

funds’ use of derivatives, we do not 

believe it is appropriate to permit 

additional leveraged ETF sponsors to 

form leveraged ETFs and operate under 

our proposed rule at this time.79

Accordingly, we propose to include a 

condition that would prevent leveraged 

ETFs from relying on proposed rule 6c– 

11.80 ETFs that seek to provide returns 

that exceed the performance (or inverse 

performance) of a market index by a 

specified multiple over a fixed period 

could not operate under our proposed 

rule. 

The daily or other periodic reset, and 

more particularly the effects of 

compounding, are what distinguish a 

leveraged ETF strategy from other 

strategies pursued by ETFs. The 

proposed condition relating to leveraged 

ETFs thus includes a temporal element 

(i.e., ‘‘over a fixed period of time’’) in 

order to specifically capture ETFs that 

seek to deliver the leveraged or inverse 

return of a market index over a fixed 

period of time, daily or otherwise.81 In 

addition, the proposed rule’s use of the 

term ‘‘multiple’’ includes leverage that 

is not evenly divisible by 100, such as 

a fund that seeks to provide a return 

equal to 150% of the performance of an 

index.82 Finally, we believe it is 

important to specify that an ETF may 

not indirectly seek to provide returns 

that exceed the performance of a market 

index by a specified multiple or to 

provide returns that have an inverse 

relationship to the performance of a 

market index over a fixed period of time 

in order to prevent a fund from 

circumventing this condition, such as 

by embedding inverse leverage in the 

underlying index. 

We request comment on excluding 

leveraged ETFs from the scope of funds 

that may rely on the proposed rule. 

• Do commenters agree that it is 

appropriate for proposed rule 6c–11 to 

include a condition that an ETF may not 

seek, directly or indirectly, to provide 

returns that exceed the performance of 

a market index by a specified multiple, 

or to provide returns that have an 

inverse relationship to the performance 

of a market index, over a fixed period 

of time? 

• Alternatively, do commenters 

believe that the structure and operation 

of leveraged ETFs do not raise issues 

that warrant our excluding them from a 

rule of general applicability related to 

the structure and operations of ETFs? If 

so, are there any conditions specific to 

leveraged ETFs that should be part of 

the rule? For example, should we permit 

leveraged ETFs to operate in reliance on 

the rule but prohibit a leveraged ETF 

that exceeds a specific multiple of the 

performance, or inverse performance, of 

a market index? If so, what multiple 

should we use? For example, ETFs 

currently may not seek investment 

results over 300% of the return (or 

inverse of the return) of the underlying 

index. Should we maintain the status 

quo with respect to the maximum 

amount of leveraged market exposure 

that leveraged ETFs may obtain (i.e., 

300%)? Should we limit ETFs to a 

higher or lower multiplier? If so, what 

multiplier and why? 

• Does the proposed rule’s use of ‘‘a 

fixed period of time’’ effectively 

describe the daily reset mechanism in 

leveraged ETFs? Are there other 

descriptions we should use? Could an 

ETF seek to provide returns that are a 

multiple, or inverse, of an index without 

this limitation? For example, would 

such an ETF be able to operate without 

the daily (or other periodic) reset? 

Would such an ETF raise the same 

investor protection issues as the 

leveraged ETFs that we are proposing to 

exclude from relying on proposed rule 

6c–11? Would they raise other investor 

protection issues? If so, what issues and 

why? 

• Does the proposed rule prevent an 

ETF from circumventing this limitation 

by embedding leverage in an index or 

through any other means? If not, should 

we consider other conditions or 

limitations, and if so, what? For 

example, should the rule provide that 

an ETF may not ‘‘obtain’’ or ‘‘provide’’ 

leveraged exposure, rather than stating 

that an ETF may not ‘‘seek’’ to provide 

leveraged exposure as proposed? 

Alternatively, should we define 

leveraged ETFs as funds currently do in 

their applications (i.e., to achieve its 

investment objective by corresponding 

to a specified multiple of the 

performance (either 125%, 150% or 

200%), or the inverse performance, or 

the inverse multiple (either 125%, 

150% or 200% of the opposite) of the 

performance of a particular securities 

index)? 83

• Proposed rule 6c–11 does not seek 

to address any concerns raised under 

section 18 of the Act by leveraged ETFs. 

Do commenters agree that this is 

appropriate? Should we consider 

additional conditions in rule 6c–11 for 

leveraged ETFs designed to address 

concerns raised under section 18 or 

other investor protection concerns 

raised by their strategies? If so, what 

conditions? Should we provide any 

relief to these ETFs under section 18 of 

the Act? 

• What types of investors purchase 

shares of leveraged ETFs? What is the 

proportion of volume from retail versus 

institutional trading? How do these 

different types of investors utilize 

leveraged ETFs? What is the typical 

holding period of leveraged ETFs by 

each type of investor? 

• What types of intermediaries are 

active with leveraged ETF investments? 

Are the current suitability requirements 

for intermediaries effective with respect 

to leveraged ETFs? What specific 

methods, if any, are intermediaries 

using to meet their suitability 

obligations for these products? Should 

we propose as part of a future 

rulemaking that leveraged ETFs be 

subject to additional requirements, 

particularly for retail investors? 84


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85This understanding is based on Commission 

staff review of registration statements filed with the 

Commission and ETF websites. 

86See supra footnote 74. 

87See e.g., Paolo Guasoni and Eberhard 

Mayerhofer, Leveraged Funds: Robust Replication 

and Performance Evaluation (2017) (‘‘Leveraged and 

inverse exchange-traded funds seek daily returns 

equal to fixed multiples of indexes’ returns. Trading 

costs implied by frequent adjustments of funds’ 

portfolios create a tension between tracking error, 

reflecting short-term correlation with the index, and 

excess return, the long-term deviation from the 

leveraged index’s performance.’’); Lu Lei, Jun Wang, 

and Ge Zhang, Long-term performance of leveraged 

ETFs, 21 Financial Services Review 1 (2012) 

(‘‘Overall our results caution against the use of 

leveraged ETFs as long-term investment substitutes 

for long or short positions of the benchmark 

indices.’’). 

88Our exemptive orders also provide relief 

allowing certain types of funds to invest in ETFs 

beyond the limits of section 12(d)(1) of the Act. We 

are not addressing this relief at this time. See infra 

section II.G. However, we are proposing to rescind 

the master-feeder relief that we previously granted 

to ETFs that do not rely on the relief as of the date 

of this proposal (June 28, 2018). We also propose 

to grandfather existing master-feeder arrangements 

involving ETF feeder funds, but prevent the 

formation of new ones, by amending relevant 

exemptive orders. See infra section II.F. 

89See 15 U.S.C. 80a–6(c). 

90Proposed rule 6c–11(b)(1). 

91See infra section II.C.1 (discussing 

circumstances where ETF shares can be 

individually redeemed). 

92See proposed rule 6c–11(a) (defining an 

exchange-traded fund, in part, as a registered openend management company that issues and redeems 

its shares in creation units). The proposed rule 

would define ‘‘creation unit’’ to mean a specified 

number of ETF shares that the ETF will issue to (or 

redeem from) an authorized participant in exchange 

for the deposit (or delivery) of a basket and a cash 

balancing amount (if any). See proposed definition 

of ‘‘creation unit’’ in rule 6c–11(a). 

93 If ETF shares were not classified as redeemable 

securities within the meaning of section 2(a)(32) of 

the Act, an ETF would be subject to the provisions 

of the Act applicable to closed-end funds. See 15 

U.S.C. 80a–5(a)(2) (defining a ‘‘closed-end 

company’’ as any management company other than 

an open-end company). 

94 15 U.S.C. 80a–5(a)(1) (defining ‘‘open-end 

company’’); 15 U.S.C. 80a–2(a)(32) (defining 

‘‘redeemable security’’). 

95See Robert Engle & Debojyoti Sarkar, 

Premiums-Discounts and Exchange Traded Funds, 

13 Journal of Derivatives 4 (Summer 2006) (‘‘Engle 

Article’’) (observing that premiums and discounts 

for domestic ETFs are generally small and highly 

transient, and that while premiums and discounts 

are larger and more persistent in international ETFs, 

they are smaller and less persistent than the 

premiums and discounts of international closedend funds); but see, e.g., Bradley Kay, Has the ETF 

Arbitrage Mechanism Failed?, Morningstar (Mar. 

11, 2009), available at http://

news.morningstar.com/articlenet/ 

article.aspx?id=283302 (stating that market prices 

for ETFs may deviate significantly from NAV 

during periods of market stress); Chris Dieterich, 

Greece ETF Pacing for Record Tumble on Huge 

Volume: Here’s What You Need to Know, Barron’s 

(June 29, 2015), available at https://

www.barrons.com/articles/greece-etf-pacing-forrecord-tumble-on-huge-volume-heres-what-youneed-to-know-1435597369 (noting that ETFs tied to 

Greek and Egyptian stocks traded at significant 

discounts to NAV when the exchanges on which 

the underlying stocks traded were closed). 

• The Commission understands that 

leveraged ETFs typically provide 

enhanced disclosure of the risks of 

investing in the ETF.85 Do investors 

understand leveraged ETFs better today 

than they did when Commission staff 

and FINRA jointly issued an investor 

alert expressing the concern that 

individual investors may be confused 

about the performance objectives of 

leveraged ETFs? 86 For example, are 

investors more likely to be aware that 

leveraged ETFs are typically designed to 

achieve their stated performance 

objectives on a periodic basis (e.g., 

daily)? Do investors understand that 

leveraged ETFs may not achieve those 

performance objectives over the longterm? 87

• Leveraged ETFs typically include 

charts in their disclosures that explain 

the potential impact of compounding to 

an investor’s returns. Should we amend 

Form N–1A to require leveraged ETFs to 

include such a chart to better explain 

the impact of compounding? Are there 

other disclosures that we should require 

leveraged ETFs to provide? If so, what 

are they? 

• Should we propose rules governing 

leveraged ETF marketing materials to 

address concerns that leveraged ETFs 

may be marketed to investors that do 

not have an appropriate risk tolerance to 

invest in these products or that lack 

understanding of leveraged ETFs’ 

strategies and risks? For example, 

should we require leveraged ETFs to 

include prescribed cautionary 

disclosures regarding these strategies 

and risks? 

B. Exemptive Relief Under Proposed 

Rule 6c–11 

Proposed rule 6c–11 would provide 

ETFs within the scope of the rule with 

exemptions from certain provisions of 

the Act that are necessary to allow ETFs 

to operate. These exemptions are 

generally consistent with the relief we 

have given to ETFs under our exemptive 

orders.88 Proposed rule 6c–11 would 

permit an ETF that meets the conditions 

of the rule to: (i) Redeem shares only in 

creation unit aggregations; (ii) permit 

ETF shares to be purchased and sold at 

market prices rather than at NAV per 

share; (iii) engage in in-kind 

transactions with certain affiliates; and 

(iv) in certain limited circumstances, 

pay authorized participants the 

proceeds from the redemption of shares 

in more than seven days. As discussed 

below in section II.C, the exemptions 

would be subject to certain conditions 

that are designed to address the 

concerns underlying the relevant 

statutory provisions and to support a 

Commission finding that the 

exemptions are in the public interest 

and consistent with the protection of 

investors and the purposes fairly 

intended by the policy and provisions of 

the Act.89

1. Treatment of ETF Shares as 

‘‘Redeemable Securities’’ 

Under proposed rule 6c–11, an ETF, 

as defined in the rule, would be 

considered to issue a ‘‘redeemable 

security’’ within the meaning of section 

2(a)(32) of the Act.90 As discussed 

above, ETFs have features that 

distinguish them from both traditional 

open-end and closed-end funds. A 

defining feature of open-end funds is 

that they offer redeemable securities, 

which allow the holder to receive his or 

her proportionate share of the fund’s 

NAV per share upon presentation of the 

security to the issuer. Although 

individual ETF shares cannot be 

redeemed, except in limited 

circumstances,91 they can be redeemed 

in creation unit aggregations.92

Therefore, we believe that ETF shares 

are most appropriately classified under 

the proposed rule as redeemable 

securities within the meaning of section 

2(a)(32),93 and that ETFs should be 

regulated as open-end funds within the 

meaning of section 5(a)(1) of the Act.94

The arbitrage mechanism that is 

central to the operation of an ETF (and 

the conditions in our relief designed to 

facilitate an effective arbitrage 

mechanism) serves to keep the market 

price of ETF shares at or close to the 

ETF’s NAV per share. As a result, even 

though only authorized participants 

may redeem creation units directly from 

the ETF at NAV per share, investors are 

able to sell their ETF shares on the 

secondary market at or close to NAV, 

similar to investors in an open-end fund 

that redeem their shares directly from 

the fund at NAV per share.95 The shares 

of closed-end funds, on the other hand, 

generally trade on the secondary market 

at a discount or premium to NAV. 

Our exemptive orders have provided 

exemptions from sections 2(a)(32) and 

5(a)(1) of the Act so that ETFs may 

register under the Act as open-end 

funds while issuing shares redeemable 

in creation units only. Unlike our 

exemptive orders, however, the 

proposed rule would not provide an 

exemption from the definition of 

‘‘redeemable security’’ in section 

2(a)(32) or from the definition ‘‘openend company’’ in section 5(a)(1). We 

believe that it is more appropriate for 

the proposed rule to address these 

questions of status by classifying ETF 

shares as ‘‘redeemable securities.’’ Thus, 


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96Section 5(a)(1) defines an ‘‘open-end company’’ 

as ‘‘a management company which is offering for 

sale or has outstanding any redeemable security of 

which it is the issuer.’’ 15 U.S.C. 80a–5(a)(1). 

97See, e.g., 15 U.S.C. 80a–22; 17 CFR 270.22c–1. 

98See 2008 ETF Proposing Release, supra 

footnote 3. See also ICI 2008 Comment Letter; 

Xshares 2008 Comment Letter. 

99See, e.g., 17 CFR 240.15c3–1. See also 

Securities Transaction Settlement Cycle, Exchange 

Act Release No. 80295 (Mar. 22, 2017) [82 FR 15564 

(Mar. 29, 2017)] (‘‘T+2 Adopting Release’’) 

(shortening the standard settlement cycle for most 

broker-dealer securities transactions to two business 

days). 

100Cf. Securities Industry Association, SEC Staff 

No-Action Letter (Nov. 21, 2005) (treating certain 

equity index-based ETFs as registered open-end 

investment companies for purposes of rule 11d1– 

2). 

101See Investment Company Liquidity Risk 

Management Programs, Investment Company Act 

Release No. 32315 (Oct. 13, 2016) [81 FR 82142 

(Nov. 18, 2016)] (‘‘LRM Adopting Release’’), at 

sections II.A. and II.J. 

102See, e.g., supra footnote 14. 

103See, e.g., Letter from James A. Brigagliano, 

Deputy Director, Division of Trading and Markets, 

to W. John McGuire, Morgan, Lewis & Bockius LLP 

re: U.S. One Trust Actively-Managed Exchange 

Traded Fund of Exchange Traded Funds, dated May 

4, 2010 (conditioning relief under Exchange Act 

Section 11(d)(1) on the ETFs continuously 

redeeming, at NAV, creation unit aggregations of 

50,000 shares valued at a minimum of $1.25 

million). 

104 Id. (representing that the ETFs would 

disseminate the IIV every 15 seconds throughout 

the trading day). 

105See, e.g., Letter from Catherine McGuire, Chief 

Counsel, Division of Market Regulation to 

Securities Industry Association, dated Nov. 21, 

2005, at n.3 and accompanying text. 

106 Id. (defining, in part, a ‘‘qualifying ETF’’ as 

consisting of a basket of twenty or more component 

securities with no one component security 

constituting more than 25% of the total value of the 

ETF). 

107 Id. 

108 2015 ETP Request for Comment, supra 

footnote 9, at n.106 and accompanying and 

following text. 

109 15 U.S.C. 80a–22(d). 

110See 17 CFR 270.22c–1. 

111See generally Mutual Fund Distribution Fees; 

Confirmations, Investment Company Act Release 

No. 29367 (July 21, 2010) [75 FR 47064 (Aug. 4, 

2010)] (discussing legislative history of section 

22(d)). 

112See proposed rule 6c-11(b)(2). The reference in 

the proposed rule to ‘‘repurchases . . . at marketdetermined prices’’ refers to secondary market 

transactions with dealers. Thus, the rule would not 

allow an ETF to repurchase shares from an investor 

at market-determined prices. 

113See, e.g., Comment Letter of Barclays Global 

Investors on 2001 Concept Release (Jan. 11, 2002) 

(‘‘[D]uring periods of market volatility . . . it is not 

unreasonable to assume that some retail investors 

would buy or sell ETF shares at secondary market 

prices moving in the opposite direction of a fund’s 

NAV.’’). 

any ETF operating in compliance with 

the rule’s conditions and requirements 

would meet the definition of open-end 

company.96

ETFs operating in reliance on the 

proposed rule would be subject to the 

requirements imposed under the Act 

and our rules that apply to all open-end 

funds.97 We note that our approach is 

substantially similar to the 2008 

proposal, which was generally 

supported by commenters.98 In 

addition, in our view the rules under 

the Exchange Act that apply to 

redeemable securities issued by an 

open-end fund would apply to ETFs 

relying on the proposed rule.99 Thus, 

proposed rule 6c–11 would result in 

ETFs relying on proposed rule 6c–11 

becoming eligible for the ‘‘redeemable 

securities’’ exceptions in 12 CFR 

242.101(c)(4) and 242.102(d)(4) (‘‘rules 

101(c)(4) and 102(d)(4) of Regulation 

M’’) and 12 CFR 240.10b–17(c) (‘‘rule 

10b–17(c) under the Exchange Act’’) in 

connection with secondary market 

transactions in ETF shares and the 

creation or redemption of creation units. 

Similarly, we would view ETFs relying 

on rule 6c–11 as within the ‘‘registered 

open-end investment company’’ 

exemption in rule 11d1–2 under the 

Exchange Act.100

We request comment on this aspect of 

the proposed rule. 

• Are there differences between ETFs 

and other open-end funds that would 

justify not applying certain open-end 

fund provisions of the Act or our rules 

to ETFs? For example, we adopted 

tailored liquidity risk management 

program requirements for ETFs under 

17 CFR 270.22e–4 (‘‘rule 22e–4’’).101

Should we consider tailored 

requirements for ETFs in connection 

with other provisions? 

• As we discussed above, ETFs 

relying on proposed rule 6c–11 would 

be able to rely on the ‘‘redeemable 

securities’’ exceptions in rules 101(c)(4) 

and 102(d)(4) of Regulation M and rule 

10b–17(c) under the Exchange Act and 

the ‘‘registered open-end investment 

company’’ exemption in rule 11d1–2 

under the Exchange Act. Should the 

Commission exempt ETFs relying on 

proposed rule 6c–11 from any other 

rules under the Exchange Act? 102 If so, 

which rules and why? For example, 

ETFs typically request relief from 

Exchange Act section 11(d)(1) and rule 

11d1–2 thereunder; and 17 CFR 

240.10b–10, 240.15c1–5, and 

240.15c1–6 (rules 10b–10, 15c1–5, and 

15c1–6 under Exchange Act). Should 

the Commission provide relief from 

these provisions under the Exchange 

Act? If so, what conditions should apply 

to such relief, if any, and why? For 

example, ETFs currently rely on relief 

that is conditioned on: minimum 

creation unit sizes; 103 dissemination of 

the Intraday Indicative Value (‘‘IIV’’); 104

restrictions on the payment of certain 

cash compensation or economic 

incentives; 105 minimum levels of 

diversification in the ETF’s basket; 106

and whether the ETF is managed to 

track an index.107 Should we eliminate 

or modify any or all of these conditions? 

We requested comment on exchange 

listing standards for ETFs and other 

ETPs in 2015.108 Do commenters have 

updated views on those requests for 

comment? 

2. Trading of ETF Shares at MarketDetermined Prices 

Section 22(d) of the Act, among other 

things, prohibits investment companies, 

their principal underwriters, and 

dealers from selling a redeemable 

security to the public except at a current 

public offering price described in the 

prospectus.109 Rule 22c–1 generally 

requires that a dealer selling, redeeming, 

or repurchasing a redeemable security 

do so only at a price based on its 

NAV.110 Together, section 22(d) and 

rule 22c–1 are designed to: (i) Prevent 

dilution caused by certain riskless 

trading practices of principal 

underwriters and dealers; (ii) prevent 

unjust discrimination or preferential 

treatment among investors purchasing 

and redeeming fund shares; and (iii) 

preserve an orderly distribution of 

investment company shares.111 ETFs 

seeking to register under the Act obtain 

exemptions from these provisions 

because investors may purchase and sell 

individual ETF shares from and to 

dealers on the secondary market at 

market-determined prices (i.e., at prices 

other than those described in the 

prospectus or based on NAV). 

Consistent with our prior exemptive 

orders, proposed rule 6c–11 would 

provide exemptions from these 

provisions.112

As discussed above, only authorized 

participants can purchase and redeem 

shares directly from an ETF at NAV per 

share and only in creation unit 

aggregations. Because authorized 

participants (and other market 

participants transacting through an 

authorized participant) can take 

advantage of disparities between the 

market price of ETF shares and NAV per 

share, they may be in a different 

position than investors who buy and 

sell individual ETF shares only on the 

secondary market.113 However, if the 

arbitrage mechanism is functioning 

effectively, entities taking advantage of 

these disparities in market price and 

NAV per share move the market price to 

a level at or close to the NAV per share 

of the ETF. The proposed rule would 

provide exemptions from section 22(d) 

and rule 22c–1 because we believe this 


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114See ICI 2008 Comment Letter; Xshares 2008 

Comment Letter. 

115See, e.g., Comment Letter of KCG Holdings, 

Inc. on 2015 ETP Request for Comment (Aug. 17, 

2015); Comment Letter of Vanguard on 2015 ETP 

Request for Comment (Aug. 17, 2015); Comment 

Letter of Charles Schwab & Co., Inc. and Charles 

Schwab Investment Management, Inc. on 2015 ETP 

Request for Comment (Aug. 17, 2015) (‘‘Schwab 

ETP Comment Letter’’) (noting that it had not 

identified any significant systemic differences in 

efficiency across various ETF products, regardless 

of ETF’s investment strategy). 

116See Comment Letter of ETF Consultants.com, 

Inc. on 2015 ETP Request for Comment (Aug. 17, 

2015); see also infra section II.H regarding bid-ask 

spreads. 

117See Comment Letter of James J. Angel, Ph.D., 

CFA on 2015 ETP Request for Comment (Aug. 17, 

2015). 

118See Comment Letter of Occupy the SEC on 

2015 ETP Request for Comment (Aug. 21, 2015). 

119Figures in this section represent an analysis by 

Commission staff of market data obtained from 

Bloomberg Professional Services and Morningstar. 

In preparing this analysis, staff used the market 

price of each ETF as of the close of trading each 

day. 

120An ETF can trade at a premium or discount 

to its NAV per share on any given day. When taking 

an average over many days, premiums (which have 

a positive difference) and discounts (which have a 

negative difference) may offset each other. 

Therefore, to calculate deviation from NAV, we use 

the absolute value of premiums and discounts when 

calculating weighted average differences to prevent 

such offsetting. 

121 International equity ETFs can provide 

exposure to markets that do not overlap with U.S. 

trading hours. In these circumstances, the deviation 

between NAV per share and market price may be 

attributable in large part to obtaining exposure to 

those markets when they are closed. 

122Most funds calculate NAV per share once per 

day as of the time the major U.S. stock exchanges 

close. See supra footnote 26. 

123Engle Article, supra footnote 95. For domestic 

ETFs, the study showed intraday average daily 

premium of 0.25 basis points with an average 

standard deviation of 11.8 basis points. For 

international ETFs, the respective figures were 23.7 

basis points and an average standard deviation of 

64.8 basis points. The intraday premium was 

measured every minute as the percentage difference 

between: (i) The average of the bid and the ask of 

the ETF shares; and (ii) the intraday indicative 

value (IIV) of the ETF’s portfolio. See infra sections 

II.C.3 and II.C.6 for a discussion of the IIV and the 

potential problems associated with using the IIV as 

a tool to measure the current value of the ETF’s 

portfolio on an ongoing basis. 

124See generally Itzhak Ben-David, et al., 

Exchange Traded Funds (ETFS), National Bureau of 

Econ., Working Paper No. 22829 (Nov. 2016), 

available at http://www.nber.org/papers/w22829 

(‘‘Ben-David’’) (‘‘Because of sparse liquidity in some 

exchanges [on the morning of August 24, 2015], 

some of the arbitrage programs diagnosed unreliable 

price data and withdrew from the market, leading 

to a positive feedback loop.’’). 

125See also Milan Borkovec, et al., Liquidity and 

Price Discovery in Exchange-Traded Funds: One of 

Several Possible Lessons from the Flash Crash, 1 

The Journal of Index Investing 2 (2010) 

(‘‘Borkovec’’) (reporting that liquidity of ETFs 

declined dramatically during the ‘‘Flash Crash,’’ 

causing spreads to widen significantly). 

126See Ben-David, supra footnote 124 (‘‘ETF 

market makers and [authorized participants] 

arguably withdrew from the market after a trading 

pause in the futures market, which they used to 

hedge their exposure in volatile trading sessions.’’) 

(internal citations omitted). Many ETFs disclose the 

risk that ETF shares will trade at a premium or 

discount, particularly during times of market 

disruptions, in their prospectuses as part of their 

principal risk disclosure. See, e.g., iShares Trust 

rule 485(b) Registration Statement (Nov. 1, 2017), 

available at https://www.sec.gov/Archives/edgar/ 

data/1100663/000119312517327588/ 

d486424d485bpos.htm (‘‘Market Trading Risk: The 

Fund faces numerous market trading risks, 

including the potential lack of an active market for 

Fund shares, losses from trading in secondary 

markets, periods of high volatility and disruptions 

in the creation/redemption process. ANY OF 

Continued 

arbitrage mechanism—and the 

conditions in this rule designed to 

promote a properly functioning 

arbitrage mechanism—have adequately 

addressed, over the significant operating 

history of ETFs, the potential concerns 

regarding shareholder dilution and 

unjust discrimination that these 

provisions were designed to address. 

We proposed the same exemptions in 

2008 and commenters who addressed 

this aspect of the 2008 ETF Proposing 

Release supported the Commission’s 

approach.114 Commenters on the 2015 

ETP Request for Comment also 

addressed the existing arbitrage 

mechanism, generally arguing that it is 

effective and efficient in ensuring that 

an ETF’s market price does not vary 

substantially from its NAV per share.115

On the other hand, one commenter 

questioned the efficacy of the arbitrage 

mechanism, particularly at the close of 

trading when bid-ask spreads tend to 

widen.116 One commenter asserted that 

the arbitrage mechanism does not work 

well for ETFs holding securities that do 

not trade during U.S. market hours.117

Another commenter argued that even if 

the arbitrage mechanism corrects price 

mismatches between market price and 

NAV per share, it does so by creating an 

unfair windfall for authorized 

participants who can capitalize on 

information asymmetries and 

operational advantages to extract value 

from the market.118

The arbitrage mechanism is the 

foundation for why retail and other 

secondary market investors generally 

can buy and sell ETF shares at prices 

that are at or close to the prices at which 

authorized participants are able to buy 

and redeem shares directly from the 

ETF at NAV. In the Commission’s 

experience, the deviation between the 

market price of ETFs and NAV per 

share, each calculated as of the close of 

trading each day, generally has been 

relatively small.119 For example, during 

2016–2017, the closing price of ETFs 

based on U.S. equity indexes were 

within 1% of NAV for 97.9% of trading 

days and within 1% of NAV for actively 

managed ETFs investing in U.S. equities 

for 98.5% of trading days. The absolute 

weighted average of the daily difference 

between the NAV and market price 

during a six-month period ending in 

December 2017 was 0.014% for ETFs 

based on U.S. equities indexes and 

0.074% for actively managed ETFs 

investing in U.S. equities.120

Other types of ETFs have had a 

somewhat higher deviation between 

NAV per share and market price. During 

2016–2017, the closing price for indexbased and actively managed ETFs 

investing in international equities, for 

example, were within 1% of NAV for 

87.4% and 86.8% of trading days, 

respectively. Similarly, the absolute 

weighted average of the daily difference 

between the NAV and market price 

during a six-month period ending in 

December 2017 for index-based and 

actively managed ETFs investing in U.S. 

fixed-income securities were 0.067% 

and 0.068%, respectively. The absolute 

weighted average of daily difference 

between NAV per share and market 

price during the six-month period 

studied was 0.206% for ETFs based on 

international equities indexes and 

0.390% for actively managed ETFs 

investing in international equities.121

These numbers represent only broad 

averages with respect to end-of-day 

differences, however, and intraday 

deviations between market price and 

NAV per share may be greater under 

certain circumstances. These figures 

also do not reflect intraday deviations 

between market prices and the 

contemporaneous value of the ETF’s 

portfolio.122 However, one academic 

paper has shown that deviations 

between intraday market prices and 

estimated intraday values for domestic 

ETFs also were generally small.123

The Commission and its staff have 

observed the operation of the arbitrage 

mechanism during periods of market 

stress when the deviation between 

intraday market prices and the nextcalculated NAV per share significantly 

widened for short periods of time. 

During periods of extraordinary 

volatility in the underlying ETF 

holdings, it may be difficult for 

authorized participants or market 

makers to confidently ascribe precise 

values to an ETF’s holdings, thereby 

making it more difficult to effectively 

hedge their positions.124 These market 

participants may widen their quoted 

spreads in ETF shares or, in certain 

cases, may elect not to transact in or 

quote ETF shares, rather than risk 

loss.125

Market makers may have already 

exhibited this behavior in periods of 

extraordinary volatility.126 For example, 


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THESE FACTORS, AMONG OTHERS, MAY LEAD 

TO THE FUND’S SHARES TRADING AT A 

PREMIUM OR DISCOUNT TO NAV.’’). 

127See Final May 6 Report, supra footnote 9, at 

n.36 and accompanying text (noting that ETFs 

accounted for approximately 70% of all securities 

with trades broken pursuant to the clearly 

erroneous execution rules on May 6). 

128See August 24 Staff Report, supra footnote 32 

(noting that ETFs as a class accounted for almost 

all of the 1,279 trading halts on August 24, 2015, 

but 80% of ETFs did not experience a single trading 

halt). 

129See Borkovec, supra footnote 125; Ben-David, 

supra footnote 124. 

130See Borkovec, supra footnote 125, at 40; see 

also Ananth Madhavan, Exchange-Traded Funds, 

Market Structure, and the Flash Crash, 68 Financial 

Analysts Journal 20 (2012) (‘‘Madhavan Article’’). 

131The Commission has taken steps to address 

disruptions in the arbitrage mechanism. For 

example, the Commission approved changes to the 

limit up-limit down rules following the market 

events on August 24, 2015. See Self-Regulatory 

Organizations; Financial Industry Regulatory 

Authority, Inc.; Notice of Filing and Immediate 

Effectiveness of a Proposed Rule Change to Clarify 

the Operation of the Regulation NMS Plan to 

Address Extraordinary Market Volatility, Exchange 

Release No. 78435 (July 28, 2016) [81 FR 51239 

(Aug. 3, 2016)]; Self-Regulatory Organizations; 

Financial Industry Regulatory Authority, Inc.; 

Notice of Filing and Immediate Effectiveness of a 

Proposed Rule Change to Extend the Effective Date 

of SR–FINRA–2016–028, Exchange Release 

No.78660 (Aug. 24, 2016) [81 FR 59676 (Aug. 30, 

2016)]. 

132For example, rule 22e–4 under the Act 

requires ETFs to consider certain additional factors 

that address the relationship between the liquidity 

of the ETF’s portfolio and the arbitrage mechanism 

in assessing, managing, and periodically reviewing 

its liquidity risk. See LRM Adopting Release, supra 

footnote 101. We have taken these requirements 

into consideration in developing the conditions in 

this proposal. 

133See infra section II.C.6. 

134See, e.g., Fidelity Commonwealth Trust, 

Investment Company Act Release Nos. 32166 (June 

29, 2016) [81 FR 44063 July 6, 2016)] (notice) and 

32191 (July 26, 2016) (order) and related 

application; Claymore Exchange-Traded Fund 

Trust, Investment Company Act Release Nos. 27469 

(Aug. 28, 2006) [71 FR 51869 (Aug. 31, 2006)] 

(notice) and 27483 (Sept. 18, 2006) (order) and 

related application. 

135See infra footnote 278 and accompanying and 

following text (noting that, currently, Form N–1A 

provides an ETF with the option to omit certain 

historical information regarding premiums and 

discounts from its prospectus and annual report if 

the disclosure is provided on its website). 

136See infra section II.H. 

137See infra section II.C.6. 

on May 6, 2010, the prices of many U.S.- 

based equity products experienced a 

significant decline and recovery, and 

many of the securities that experienced 

the greatest price changes were equitybased ETFs.127 Significant price 

volatility on the morning of August 24, 

2015 triggered limit up-limit down 

pauses in many equity securities, 

including many ETFs.128 In both 

instances, certain ETFs saw larger 

intraday premiums/discounts and wider 

bid-ask spreads for portions of the 

trading day.129 Deviations between 

market price and NAV per share were 

closed after relatively short periods, 

however, as the arbitrage mechanism 

resumed its effectiveness.130

Accordingly, we recognize that under 

certain circumstances, including during 

periods of market stress, the arbitrage 

mechanism may work less effectively 

for a period of time. We also recognize 

that secondary market investors who 

trade in ETF shares during these periods 

may be harmed by trading at a price that 

is not close to the NAV per share of the 

ETF (or the contemporaneous value of 

the ETF’s portfolio). On balance, 

however, we believe these investors are 

more likely to weigh the potential 

benefits of ETFs (e.g., low cost and 

intraday trading) against any potential 

for market price deviations when 

deciding whether to utilize ETFs.131

Further, we believe that the conditions 

we are proposing as part of rule 6c–11, 

along with other recent actions that are 

designed to promote an effective 

arbitrage mechanism,132 would continue 

to result in a sufficiently close 

alignment between an ETF’s market 

price and NAV per share in most 

circumstances, and provide an 

appropriate basis for the exemptive 

relief we are proposing. We particularly 

find this to be the case given the 

benefits ETFs offer investors, as 

discussed above. 

Furthermore, to the extent that there 

are instances where bid-ask spreads 

widen, or premiums and discounts 

persist, the proposed rule and 

disclosure amendments would require 

ETFs to disclose certain information on 

their website.133 We believe that it is 

important for investors to be informed 

where costs may increase beyond what 

they would reasonably expect. Our 

exemptive orders have required ETFs’ 

websites to disclose, among other 

things, the ETF’s NAV per share for the 

prior business day, the market closing 

price or the midpoint of the bid-ask 

spread at the time of the calculation of 

NAV, and a calculation of the premium 

or discount of the market closing price 

or midpoint of the bid-ask spread 

against NAV per share.134 However, the 

proposed rule and disclosure 

amendments would require ETFs to 

disclose additional information on their 

websites that is not currently required 

under our exemptive orders.135

In particular, as discussed in section 

II.C.6, we are proposing to require ETFs 

to disclose on their websites the median 

bid-ask spread for the ETF’s most recent 

fiscal year and certain historical 

information about the extent and 

frequency of an ETF’s premiums and 

discounts. This would allow investors 

to be more aware of this risk when 

deciding whether to invest in ETFs 

generally or in a particular ETF. Our 

proposed amendments to Form N–1A 

would require additional disclosure 

regarding ETF trading information and 

related costs, including information 

relating to high-end (95th percentile) 

spread costs.136 We also request 

comment below on whether there are 

other ways to calculate premiums and 

discounts, or other metrics we should 

consider, to better inform investors 

about an ETF’s history of deviations 

between intraday market prices and (i) 

the next-calculated NAV; or (ii) the 

contemporaneous value of the ETF’s 

portfolio.137

We request comment on the proposed 

exemptions from section 22(d) of the 

Act and rule 22c–1 thereunder. 

• Is the proposed relief sufficient to 

facilitate transactions in ETF shares on 

the secondary market? 

• Will the proposed conditions 

(discussed below) promote the arbitrage 

mechanism and support the 

Commission granting this relief? Are 

there other conditions we should 

consider? 

• Under what circumstances could a 

premium or discount for an ETF 

develop or persist? For example, when 

would a premium or discount develop 

due to a break-down in the arbitrage 

mechanism? Are there instances where 

a premium or discount may develop or 

persist because of price discovery, such 

as when the underlying markets for the 

ETF’s component securities are closed? 

Are there instances where a premium or 

discount may develop or persist because 

of transaction costs relating to the ETF’s 

basket securities? How can these 

circumstances be distinguished from 

one another? Should we consider any 

changes to our proposal to account for 

these different circumstances? 

• Would the arbitrage mechanism 

contemplated by the proposed rule keep 

ETF market prices at or close to NAV 

per share under normal market 

conditions? How should this be 

measured? For example, is it 

appropriate to assess premiums and 

discounts solely by comparing ETF 

market prices to the ETF’s NAV, which 

typically is calculated at the end of the 

day? Should intraday calculations play 

a larger role when assessing premiums 

and discounts? Should we, for example, 

assess the efficiency of the arbitrage 

mechanism by comparing the mean/ 

median of the market prices on a given 

trading day against the end of day NAV? 

Alternatively, should we compare the 

mean/median of the market price on a 

given trading day against an intraday 


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138 15 U.S.C. 80a–17(a). 

139 15 U.S.C. 80a–2(a)(3)(A), (B) and (C). A control 

relationship is presumed when one person owns 

more than 25% of another person’s outstanding 

voting securities. 15 U.S.C. 80a–2(a)(9). 

140See, e.g., Barclays Global 2000, supra footnote 

6 (‘‘Because purchases and redemptions of Creation 

Units may be ‘in-kind’ rather than cash 

transactions, section 17(a) may prohibit affiliated 

persons of an [ETF] from purchasing or redeeming 

Creation Units.’’). 

141See e.g., Barclays Global 2008, supra footnote 

58. 

142See proposed rule 6c–11(b)(3). 143See id. To utilize custom baskets, proposed 

rule 6c–11(c)(3) would require an ETF to adopt and 

implement written policies and procedures that: (i) 

Set forth detailed parameters for the construction 

and acceptance of custom baskets that are in the 

best interests of the ETF and its shareholders, 

including the process for any revisions to, or 

deviations from, those parameters; and (ii) specify 

the titles or roles of the employees of the ETF’s 

investment adviser who are required to review each 

custom basket for compliance with those 

parameters. 

144See, e.g., Comment Letter of Barclays Capital 

Inc. (May 8, 2008); ICI 2008 Comment Letter; SSgA 

2008 Comment Letter. 

145See, e.g., ICI 2008 Comment Letter; BGFA 

2008 Comment Letter. 

146See, e.g., ICI 2008 Comment Letter; ABA 2008 

Comment Letter. 

147 Item E.2.a. of Form N–CEN requires ETFs to 

provide certain identifying information regarding 

its authorized participants. See Investment 

Company Reporting Modernization Adopting 

Release, Investment Company Act Release No. 

32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] 

(‘‘Reporting Modernization Adopting Release’’) 

(‘‘[C]ollecting information concerning these entities 

on an annual basis will allow [the Commission] to 

understand and better assess the size, capacity, and 

concentration of the authorized participant 

framework and also inform the public about certain 

characteristics of the ETF primary markets.’’). 

148See proposed rule 6c–11(c)(3). 

measure of the value of an ETF’s 

portfolio? 

3. Affiliated Transactions 

Section 17(a) of the Act generally 

prohibits an affiliated person of a 

registered investment company, or an 

affiliated person of such person, from 

selling any security or other property to 

or purchasing any security from the 

company.138 Purchases and 

redemptions of ETF creation units are 

typically effected in kind, and section 

17(a) prohibits these in-kind purchases 

and redemptions by affiliated persons of 

the ETF. An affiliated person of an ETF 

includes, among others: (i) Any person 

directly or indirectly owning, 

controlling, or holding with power to 

vote, 5% or more of the outstanding 

voting securities of the ETF; (ii) any 

person 5% or more of whose 

outstanding voting securities are 

directly or indirectly owned, controlled, 

or held with power to vote by the ETF; 

and (iii) any person directly or 

indirectly controlling, controlled by, or 

under common control with the ETF.139

ETF applicants have requested, and 

we have granted, exemptive relief from 

section 17(a) of the Act for: (i) Persons 

affiliated with the ETF based on their 

ownership of 5% or more of the ETF’s 

outstanding securities (‘‘first-tier 

affiliates’’); and (ii) affiliated persons of 

the first-tier affiliates or persons who 

own 5% or more of the outstanding 

securities of one or more funds advised 

by the ETF’s investment adviser 

(‘‘second-tier affiliates’’).140 In seeking 

this relief, applicants have stated that 

first- and second-tier affiliates are not 

treated differently from non-affiliates 

when engaging in purchases and 

redemptions of creation units.141 All 

purchases and redemptions of creation 

units are at an ETF’s next-calculated 

NAV pursuant to rule 22c–1. 

Additionally, the securities deposited or 

delivered upon redemption are valued 

in the same manner, using the same 

standards, as those securities are valued 

for purposes of calculating the ETF’s 

NAV per share. 

Proposed rule 6c–11 similarly would 

provide exemptions from sections 

17(a)(1) and (a)(2) of the Act with regard 

to the deposit and receipt of baskets to 

a person who is an affiliated person of 

an ETF (or who is an affiliated person 

of such a person) solely by reason of: (i) 

Holding with the power to vote 5% or 

more of an ETF’s shares; or (ii) holding 

with the power to vote 5% or more of 

any investment company that is an 

affiliated person of the ETF.142 We 

believe that this relief is necessary to 

facilitate the efficient functioning of the 

arbitrage mechanism. Without it, an 

authorized participant or other market 

participant that becomes an affiliated 

person of the ETF due to its holdings 

would be prevented from engaging in 

arbitrage using an in-kind basket. This, 

in turn, could have the adverse effect of 

limiting the pool of market participants 

that could engage in arbitrage. 

Ultimately, it could result in the 

deviation between market price and 

NAV per share widening in cases where 

there are very few authorized 

participants or other market participants 

actively engaged in transactions with 

the ETF. The arbitrage mechanism for 

newly launched ETFs could be 

particularly challenged without this 

relief because every purchaser of a 

creation unit would be considered an 

affiliated person of the ETF so long as 

there are fewer than twenty creation 

units outstanding. We also believe that 

this relief is appropriate because all 

purchases and redemptions of creation 

units are at an ETF’s next-calculated 

NAV, and the securities deposited or 

delivered upon redemption would be 

valued in the same manner, using the 

same standards, as those securities are 

valued for purposes of calculating the 

ETF’s NAV. 

The exemption in proposed rule 6c– 

11(b)(3) is similar to the section 17(a) 

exemption we proposed in 2008, 

although the relief would be subject to 

certain additional conditions related to 

custom baskets.143 Commenters who 

addressed the proposed relief in 2008 

supported it.144 Several commenters, 

however, requested that the relief be 

expanded to cover additional types of 

affiliated relationships, such as brokerdealers that are affiliated with the ETF’s 

adviser.145 These commenters noted 

that any Commission concern of undue 

influence by the affiliate would be 

addressed by the federal securities laws 

and regulations that prohibit 

manipulative practices and misuse of 

nonpublic information, and that ETFs 

would benefit from an increase in 

entities eligible to transact with the 

ETF.146 An increase in the number of 

authorized participants could also help 

to reduce the potential for an ETF to be 

reliant on one or more particular 

authorized participants.147

While we acknowledge that an 

increase in entities eligible to transact 

with an ETF could facilitate the 

arbitrage mechanism and reduce 

concentration risk, we preliminarily do 

not believe that it is appropriate to 

expand the scope of affiliated persons 

covered by the exemption at the same 

time that we are permitting additional 

flexibility with respect to custom 

baskets. The proposed rule would allow 

an ETF to utilize custom baskets if 

certain conditions are met, increasing 

the possibility that affiliates and nonaffiliates could be treated differently in 

connection with an ETF’s receipt or 

delivery of baskets.148 We believe that 

the conditions related to the issuance or 

acceptance of custom baskets in 

proposed rule 6c–11 would provide 

appropriate protections against 

overreaching and similar abusive 

practices when an ETF exchanges a 

custom basket with an affiliate; 

however, limiting the types of affiliates 

that are permitted to rely on this 

exemption would serve as an additional 

protection against potential disparate 

treatment in connection with an ETF’s 

receipt or delivery of baskets. 

We request comment on this aspect of 

the proposed rule. 

• Without an exemption from section 

17(a) of the Act, would ETFs or 

authorized participants bear any costs 

that they do not incur today? 

• As discussed above, the exemptive 

relief from section 17(a) of the Act that 

we are proposing would apply only to 


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37346 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

149 15 U.S.C. 80a–22(e). 

150See, e.g., Parker Global Strategies, supra 

footnote 18. 

151See Investment Trusts and Investment 

Companies: Hearings on S. 3580 Before a 

Subcomm. of the Senate Comm. on Banking and 

Currency, 76th Cong., 3d Sess. 291–293 (statements 

of David Schenker). 

152Proposed rule 6c–11(b)(4). This relief from the 

requirements of section 22(e) would not affect any 

obligations arising under rule 15c6–1 under the 

Exchange Act, which requires that most securities 

transactions be settled within two business days of 

the trade date. 17 CFR 240.15c6–1. 

153Proposed rule 6c–11(b)(4). 

154While mutual funds also may invest in foreign 

investments that require a delivery process in 

excess of seven days, mutual funds typically deliver 

redemption proceeds in cash, rather than in kind. 

Mutual funds, ETFs that redeem in cash, and ETFs 

that substitute cash in lieu of a particular foreign 

investment in a basket do not require an exemption 

from section 22(e) of the Act. 

155Austria, Belgium, Bulgaria, Croatia, Cyprus, 

the Czech Republic, Denmark, Estonia, Finland, 

France, Germany, Greece, Hungary, Iceland, Italy, 

Ireland, the Netherlands, Latvia, Lichtenstein, 

Lithuania, Luxembourg, Malta, Norway, Poland, 

Portugal, Romania, Slovakia, Slovenia, Spain 

(certain fixed-income trades only), Sweden, 

Switzerland, and the United Kingdom moved to a 

T+2 settlement cycle by the end of 2014, while 

Australia and New Zealand transitioned to a T+2 

settlement cycle in 2016. See Amendments to 

Securities Transaction Settlement Cycle, Exchange 

Act Release No. 78962 (Sept. 28, 2016) [81 FR 

69240 (Oct. 5, 2016)], at n.134. Like the United 

States, Mexico, Canada, Peru and Argentina moved 

to a T+2 settlement cycle in September 2017. See 

T+2 Adopting Release, supra footnote 99. See also 

Annie Massa, Your Trades Will Soon Spend Less 

Time Stuck in Market’s Plumbing, Bloomberg 

Markets (Aug. 31, 2017), available at https://

www.bloomberg.com/news/articles/2017-08-31/ 

your-trades-will-soon-spend-less-time-stuck-inmarket-s-plumbing. There are many securities that 

trade over the counter (OTC) in certain foreign 

markets with agreed-upon settlement timeframes 

between the parties that could extend beyond the 

settlement timeframes of central securities 

depositories. 

156ETFs that invest in foreign investments from 

jurisdictions that continue to require more than 

seven days to deliver redemption proceeds would 

have the option of redeeming in cash rather than 

in-kind once the exemptive relief sunsets. Such 

ETFs also could request targeted exemptive relief 

from section 22(e) from the Commission. 

157See 2008 ETF Proposing Release, supra 

footnote 3. 

158See, e.g., Katten 2008 Comment Letter; 

Xshares 2008 Comment Letter. 

159 Katten 2008 Comment Letter (recommending 

up to 14 days). 

160See, e.g., Legg Mason ETF Trust, Investment 

Company Act Release Nos. 30237 (Oct. 22, 2012) 

in-kind purchases and redemptions of 

creation units, and only to persons 

affiliated with the ETF (or affiliates of 

those persons) by reason of holding the 

power to vote 5% or more of the ETF’s 

shares or holding the power to vote 5% 

or more of any investment company that 

is affiliated with the ETF. Should the 

relief extend to parties that are affiliated 

persons of an ETF for other reasons, or 

to non-creation unit transactions, such 

as portfolio transactions? For example, 

should a broker-dealer that is affiliated 

with the ETF’s adviser be allowed to 

transact in kind with the ETF? If so, 

should the proposed rule include any 

additional conditions to minimize 

potential risks of overreaching for this 

type of affiliated person? How would 

expanding the scope of the exemption 

in this manner interact with the 

proposed conditions regarding basket 

flexibility? 

4. Additional Time for Delivering 

Redemption Proceeds 

Section 22(e) of the Act generally 

prohibits a registered open-end 

management investment company from 

postponing the date of satisfaction of 

redemption requests for more than 

seven days after the tender of a security 

for redemption.149 This prohibition can 

cause operational difficulties for ETFs 

that hold foreign investments and 

exchange in-kind baskets for creation 

units. For example, local market 

delivery cycles for transferring foreign 

investments to redeeming investors, 

together with local market holiday 

schedules, can sometimes require a 

delivery process in excess of seven days. 

These ETFs have previously requested, 

and we have granted, relief from section 

22(e) so that they may satisfy 

redemptions up to a specified maximum 

number of days (depending upon the 

local markets), as disclosed in the ETF’s 

prospectus or statement of additional 

information (‘‘SAI’’). Other than in the 

disclosed situations, these ETFs satisfy 

redemptions within seven days.150

Section 22(e) was designed to prevent 

unreasonable delays in the actual 

payment of redemption proceeds.151

Proposed rule 6c–11 would provide an 

exemption from section 22(e) of the Act 

because we believe that the limited 

nature of the exemption addresses the 

concerns underlying this section of the 

Act. As proposed, rule 6c–11 would 

grant relief from section 22(e) to permit 

an ETF to delay satisfaction of a 

redemption request for more than seven 

days if a local market holiday, or series 

of consecutive holidays, the extended 

delivery cycles for transferring foreign 

investments to redeeming authorized 

participants, or the combination thereof 

prevents timely delivery of the foreign 

investment included in the ETF’s 

basket.152 To rely on this exemption, an 

ETF would be required to deliver 

foreign investments as soon as 

practicable, but in no event later than 15 

days after the tender to the ETF.153 This 

proposed exemption thus would permit 

a delay in the delivery of foreign 

investments only if the foreign 

investment is being transferred in kind 

as part of the basket.154

The exemption would permit a delay 

only to the extent that additional time 

for settlement is actually required, when 

a local market holiday, or series of 

consecutive holidays, or the extended 

delivery cycles for transferring foreign 

investments to redeeming authorized 

participants prevents timely delivery of 

the foreign investment included in the 

ETF’s basket. To the extent that 

settlement times continue to shorten, 

the ‘‘as soon as practicable’’ language 

embedded in the exemption is designed 

to minimize any unnecessary settlement 

delays.155 If a foreign investment settles 

in less than 15 days, the ETF would be 

required to deliver it pursuant to the 

standard settlement time of the local 

market where the investment trades. 

In addition, given the continued 

movement toward shorter settlement 

times in markets around the world, we 

believe that the relief from section 22(e) 

in the proposed rule does not need to be 

permanent. Accordingly, we propose to 

include a sunset provision in the 

proposed rule relating to the relief from 

section 22(e). Absent further action by 

the Commission, the exemption from 

section 22(e) for postponement of 

delivering redemption proceeds would 

expire ten years from the rule’s effective 

date. We believe that technological 

innovation and changes in market 

infrastructures and operations will lead 

to further shortening of settlement 

cycles, although these developments 

may be gradual. Therefore, we believe it 

is appropriate for the relief from section 

22(e) to be limited in duration to ten 

years.156

In 2008, we proposed a similar 

exemption for postponement of 

delivering redemption proceeds. 

However, that exemption would have 

allowed up to 12 days to deliver 

redemption proceeds without an 

offsetting requirement to deliver as soon 

as practicable and without a sunset 

provision.157 Commenters on the 2008 

proposal agreed that the specified delay 

in satisfying redemption requests 

seemed reasonable because it was for a 

limited period of time and disclosed to 

investors.158 However, one commenter 

suggested increasing the period of time 

for settlement beyond 12 days 

consistent with the terms of exemptive 

orders that had been issued to some 

ETFs.159 Since 2012, numerous 

applicants for exemptive relief have 

indicated that payment or satisfaction of 

redemption requests may take as long as 

15 days after a redemption request is 

received, and we have issued orders 

permitting delayed delivery of 

settlement proceeds for up to 15 

days.160 We believe an extended 


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Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37347 

[77 FR 65425 (Oct. 26, 2012)] (notice) and 30265 

(Nov. 16, 2012) (order) and related application 

(‘‘Legg Mason’’). 

161See 2008 ETF Proposing Release, supra 

footnote 3. 

162For example, an authorized participant acting 

as an agent typically would share this information 

with its customer if it is a necessary part of the 

creation or redemption process. 

163See proposed rule 6c–11(a); see also rule 

201(a) of Regulation S–K [17 CFR 229.201(a)] 

(describing how a registrant should identify its 

principal United States market or markets); rule 

3b–4 of the Exchange Act [17 CFR 240.3b–4]. 

164The 2008 proposal defined ‘‘foreign security’’ 

as any security issued by a government or political 

subdivision of a foreign country, or corporation or 

other organization incorporated or organized under 

the laws of any foreign country and for which there 

is no established U.S. public trading market. See 

2008 ETF Proposing Release, supra footnote 3. 

165Rule 3b-4 under the Exchange Act was 

adopted in 1967. See Adoption of Rules Relating to 

Foreign Securities, Exchange Act Release No. 8066 

(Apr. 28, 1967) [32 FR 7848 (May 30, 1967)]. 

166The rule does not rely on registration status 

because an unregistered large foreign private issuer 

may have an active U.S. market for its securities, 

in which case the ETF should be able to meet 

redemption requests in a timely manner. See 

Termination of a Foreign Private Issuer’s 

Registration of a Class of Securities Under Section 

12(g) and Duty to File Reports Under Section 13(a) 

or 15(d) of the Securities Exchange Act of 1934, 

Exchange Act Release No. 55540 (Mar. 27, 2007) [72 

FR 16934 (Apr. 5, 2007)]. 

167See, e.g., Redwood Investment Management, 

LLC, et al., Investment Company Act Release Nos. 

33076A (Apr. 26, 2018) [83 FR 19367 (May 2, 2018)] 

(notice) and 33100 (May 21, 2018) (order) and 

related application. 

settlement period in these 

circumstances of 15 days, with the 

requirement that delivery nevertheless 

be made as soon as practicable, is 

reasonable in light of the limited nature 

and duration of the exemption. 

The exemption we proposed in 2008 

would have required an ETF to disclose 

in its registration statement the foreign 

holidays that it expects may prevent 

timely delivery of foreign securities, and 

the maximum number of days that it 

anticipates it will need to deliver the 

foreign securities.161 We are not 

proposing a similar requirement for 

several reasons. First, we do not believe 

this disclosure is relevant to investors 

who purchase ETF shares on the 

secondary market, because the 

settlement of these investors’ ETF trades 

would be unaffected by the potential 

delay. Only authorized participants 

engaged in redemption transactions 

with the ETF (and market participants 

that use the authorized participants as 

their agents for transacting with the 

ETF) would be affected. We believe that 

information regarding these potential 

delays is typically covered in the 

agreement governing the relationship 

between the ETF and the authorized 

participant (an ‘‘authorized participant 

agreement’’) and would likely be shared 

by the authorized participant with other 

market participants, as necessary.162

Therefore, authorized participants 

already have information regarding 

potential delays. Second, given that 

these delays are typically covered by the 

authorized participant agreement, we do 

not believe it is necessary to require 

ETFs to provide registration statement 

disclosures. 

The proposed rule would define 

‘‘foreign investment’’ as any security, 

asset or other position of the ETF issued 

by a foreign issuer (as defined by rule 

3b–4 under the Exchange Act) for which 

there is no established U.S. public 

trading market (as that term is used in 

Regulation S–K under the Securities 

Act).163 This definition differs from the 

one we proposed in 2008 in that it 

references rule 3b–4 rather than 

enumerating the types of foreign entities 

that are considered issuers of foreign 

investments.164 We believe this 

approach is appropriate because it 

creates consistency with a long-accepted 

definition under Exchange Act rules.165

The reference to whether the investment 

has an ‘‘established U.S. public trading 

market’’ is designed to make the relief 

unavailable to an ETF that could trade 

the investment in its basket on a U.S. 

market, thereby avoiding the settlement 

delay that is the basis for the relief.166

In addition, this definition is not limited 

to ‘‘foreign securities,’’ but also would 

include other investments that may not 

be considered securities. Although these 

other investments may not be securities, 

they may present the same challenges 

for timely settlement as foreign 

securities if they are transferred in kind. 

This approach is consistent with the 

terms of some recent exemptive orders 

that provide relief from section 22(e) for 

the delivery of foreign investments that 

may not be securities.167

We request comment on this aspect of 

the proposed rule. 

• Is this relief necessary, particularly 

given that many non-U.S. jurisdictions 

have shorter settlement periods today 

than when we began granting this relief 

to ETFs? We specifically request 

comment regarding how frequently 

ETFs rely on this exemption. Should we 

permit the delayed delivery of 

settlement proceeds for up to 15 days? 

Is this period too long or too short? 

Should the rule refer to the applicable 

local market’s settlement cycle without 

specifying a number of days? Should we 

require that the ETF deliver foreign 

investments as soon as practicable, as 

proposed, in order to minimize 

unnecessary settlement delays? 

• Should we include a sunset 

provision for this relief as proposed? Is 

the duration of the proposed sunset 

provision appropriate? Should it be 

longer or shorter? 

• Is the proposed definition of 

‘‘foreign investment’’ appropriate for 

identifying investments that may 

routinely settle more than seven days 

after a redemption request? For 

example, are there circumstances where 

a U.S. entity could be subject to delays 

due to local market restrictions? Should 

we utilize a definition found elsewhere 

in rules and regulations set forth under 

the Exchange Act, the Investment 

Company Act, or other securities laws 

(e.g., the definition of ‘‘foreign security’’ 

set forth in rule 15a–6 under the 

Exchange Act, or the definition of 

‘‘foreign assets’’ set forth in rule 17f–5 

under the Investment Company Act)? 

Alternatively, should we utilize the 

definition of ‘‘foreign security’’ set forth 

in the 2008 ETF Proposing Release, or 

utilize an entirely new definition? If 

recommending an alternate definition, 

please explain the specific types of 

investments that would be better 

captured or that would be excluded by 

that definition. 

• Should the rule also provide relief 

if an ETF has foreign investments in its 

portfolio (and not in a particular 

basket)? If so, why? Should the rule 

permit the delayed delivery of the entire 

basket (instead of the specific foreign 

investments in a basket) if the basket is 

composed substantially of foreign 

investments subject to potential delays 

in the delivery of settlement proceeds? 

• Are we correct that information 

regarding potential delays in the 

delivery of settlement proceeds for 

foreign investments typically is covered 

in the authorized participant agreement? 

If so, are we also correct that authorized 

participants acting as agents typically 

would share this information with their 

customers if it is a part of the 

redemption process? 

• Should the rule require disclosure 

in an ETF’s Statement of Additional 

Information of the foreign holidays an 

ETF expects may prevent timely 

delivery of the foreign investments and 

the maximum number of days it 

anticipates it would need to deliver the 

foreign investments as required by 

current exemptive orders? For example, 

should we require ETFs relying on this 

exemption to include a more general 

statement in their prospectus or SAI that 

the ETF may take up to 15 days to 

deliver settlement proceeds for certain 

foreign investments affected by foreign 

holidays, rather than the more specific 

statement of each holiday an ETF 

expects may prevent timely delivery of 

the investments that is currently 

required? Should these disclosures be 

included in an ETF’s sales literature or 


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168See proposed rule 6c–11(a). See also infra 

section II.C.5 (discussing definitions of baskets and 

cash balancing amount). 

169Proposed rule 6c–11(a). 

170See Instruction to Item E.2 of Form N–CEN. 

See also Reporting Modernization Adopting 

Release, supra footnote 147. 

171See, e.g., Legg Mason, supra footnote 160. The 

2008 proposal would not have defined the term 

‘‘authorized participant’’ because this term was not 

used in the definition of an ETF. See 2008 ETF 

Proposing Release, supra footnote 3 (defining ETF 

to mean, in relevant part, a registered open-end 

management company that issues (or redeems) 

creation units in exchange for the deposit (or 

delivery) of basket assets). 

172See infra section II.J. 

173Proposed rule 6c–11(a). 

174See, e.g., Legg Mason, supra footnote 160. 

175See 2008 ETF Proposing Release, supra 

footnote 3; see also, e.g., Comment Letter of James 

J. Angel (May 16, 2008); Comment Letter of 

Chapman and Cutler LLP (May 19, 2008) 

(‘‘Chapman 2008 Comment Letter’’). 

176See 2008 ETF Proposing Release, supra 

footnote 3 (describing arbitrage, for these purposes, 

as ‘‘the purchase (or redemption) of shares from the 

ETF with an offsetting sale (or purchase) of shares 

on a national securities exchange at as nearly the 

same time as practicable for the purpose of taking 

advantage of a difference in the Intraday Value and 

the [market price] of the shares.’’). 

177See, e.g., Vanguard 2008 Comment Letter; 

BGFA 2008 Comment Letter. But see Xshares 2008 

Comment Letter (‘‘The proposal to ‘establish 

creation unit sizes the number of which is 

reasonably designed to facilitate arbitrage’ seems to 

describe the process that we apply when 

determining the basket size and is appropriate, as 

is the definition of arbitrage.’’). 

178See ICI 2008 Comment Letter; Katten 2008 

Comment Letter. 

179See 2008 Proposing Release, supra footnote 3. 

180See id. 

on its website? Alternatively, should we 

require ETFs to provide a written notice 

of the foreign holidays an ETF expects 

may prevent timely delivery of the 

foreign investments to authorized 

participants as a condition to rule 

6c–11? If so, how often should this 

information be updated? 

• Do secondary market investors or 

others use information regarding delays 

in the delivery of foreign investments? 

C. Conditions for Reliance on Proposed 

Rule 6c–11 

Proposed rule 6c–11 would require 

ETFs to comply with certain conditions 

that would allow them to operate within 

the scope of the Act, and that are 

designed to protect investors and to be 

consistent with the purposes fairly 

intended by the policy and provisions of 

the Act. These conditions are generally 

consistent with the conditions we have 

imposed under our exemptive orders, 

which we believe have effectively 

accommodated the unique structural 

and operational features of ETFs while 

maintaining appropriate protections for 

ETF investors. The conditions also 

reflect certain changes to the conditions 

imposed under our exemptive orders 

that, based on 26 years of experience 

regulating ETFs, we believe will 

improve the overall regulatory 

framework for these products. 

1. Issuance and Redemption of Shares 

Proposed rule 6c–11 would include 

several requirements in the paragraph 

defining ‘‘exchange-traded fund,’’ 

including a requirement that the ETF 

issue (and redeem) creation units to 

(and from) authorized participants in 

exchange for baskets and a cash 

balancing amount (if any).168 As such, 

the proposed rule would seek to 

preserve the existing structure, reflected 

in our ETF exemptive orders, whereby 

only an authorized participant of an 

ETF may purchase creation units from 

(or sell creation units to) the ETF. This 

requirement is designed to preserve an 

orderly creation unit issuance and 

redemption process between ETFs and 

authorized participants. An orderly 

creation unit issuance and redemption 

process is of central importance to the 

arbitrage mechanism, which forms the 

basis for several of the proposed rule’s 

exemptive provisions. 

The proposed rule would define an 

authorized participant as a member or 

participant of a clearing agency 

registered with the Commission, which 

has a written agreement with the ETF or 

one of its service providers that allows 

the authorized participant to place 

orders for the purchase and redemption 

of creation units.169 This definition 

differs from the definition of 

‘‘authorized participant’’ we recently 

adopted in connection with Form N– 

CEN, which, in relevant part, defines 

the term as a broker-dealer that is also 

a member of a clearing agency registered 

with the Commission or a DTC 

Participant and has a written agreement 

with the ETF or one of its service 

providers that allows the authorized 

participant to place orders to purchase 

and redeem creation units of the ETF.170

Our proposed definition also differs 

from the definition of authorized 

participant in our ETF exemptive orders 

and Form N–CEN, because it does not 

include a specific reference to an 

authorized participant’s participation in 

DTC since DTC is itself a clearing 

agency.171 We believe the definition that 

we are proposing remains largely 

consistent with our existing exemptive 

relief, while eliminating unnecessary 

terms. As discussed further below, we 

are proposing a corresponding 

amendment to Form N–CEN.172

The proposed rule would define the 

term ‘‘creation unit’’ to mean a specified 

number of ETF shares that the ETF will 

issue to (or redeem from) an authorized 

participant in exchange for the deposit 

(or delivery) of a basket and a cash 

balancing amount (if any).173 In their 

exemptive applications, ETFs have 

stated that they would establish a 

specific creation unit size (i.e., a 

minimum number of shares).174

Creation unit aggregations may differ 

among ETFs based on an ETF’s 

investment strategy, the type and 

availability of the assets in the basket, 

and the types of authorized participants 

(and other market participants) that are 

expected to engage in creation and 

redemption transactions with the ETF. 

For example, an ETF tracking a 

narrowly focused niche strategy may 

establish a smaller creation unit size 

than an ETF tracking a broad-based 

index, such as the S&P 500, in order to 

facilitate arbitrage. Accordingly, we do 

not believe it is necessary to mandate a 

particular maximum or minimum 

creation unit size for all types of ETFs. 

This approach is consistent with our 

2008 proposal, and commenters who 

addressed this aspect of the 2008 

proposal generally supported it.175

While we believe that creation unit 

sizes are an important component in 

effective arbitrage, we do not propose to 

expressly require, as we proposed in 

2008, that an ETF establish creation unit 

sizes reasonably designed to facilitate 

arbitrage.176 Commenters on this aspect 

of the 2008 proposal generally believed 

that the proposed standard was too 

vague and that an ETF would not have 

an incentive to establish creation unit 

sizes that would be too large or too 

small to facilitate effective arbitrage.177

Some commenters also questioned the 

description of arbitrage embedded 

within the 2008 definition of creation 

unit on the basis that the definition did 

not capture all forms of arbitrage.178

As we noted in the 2008 proposal, a 

large creation unit size could reduce the 

willingness or ability of authorized 

participants (and other market 

participants) to engage in creation unit 

purchases or redemptions.179 Impeding 

the ability of authorized participants to 

purchase and redeem ETF shares could 

disrupt arbitrage pricing discipline, 

which could lead to more frequent 

occurrences of premiums or discounts 

to NAV per share of the ETF. 

Conversely, a small creation unit size 

could discourage market making and 

render creation units irrelevant because 

the ETF could issue and redeem ETF 

shares much like a mutual fund.180 We 

agree with the view that ETFs are not 

likely to have an incentive to set very 

large or very small creation unit sizes 

that could disrupt the arbitrage 


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181See proposed rule 6c–11(c)(5). 

182See, e.g., Application of FFCM, LLC, et al. 

(June 12, 2017), at n.23 (‘‘Therefore, in the event of 

a termination, the Board in its discretion could 

determine to permit the Shares to be individually 

redeemable. In such circumstances, the Fund might 

elect to pay cash redemptions to all shareholders, 

with an ‘in-kind’ election for shareholders owning 

in excess of a certain stated minimum amount.’’). 

183Section 22(e) of the Act permits open-end 

funds to suspend redemptions and postpone 

payment for redemptions already tendered for any 

period during which the New York Stock Exchange 

is closed (other than customary weekend and 

holiday closings) and in three additional situations 

if the Commission has made certain determinations. 

See LRM Adopting Release, supra footnote 101, at 

n.36. 

184See supra footnote 24 and accompanying text. 

Rule 22c–2 limits redemption fees to no more than 

2% of the value of shares redeemed. See rule 22c– 

2(a)(1)(i). In other contexts, the Commission has 

limited redemption fees paid by redeeming 

shareholders, as well as swing pricing NAV 

adjustments, to no more than 2%. See Investment 

Company Swing Pricing, Investment Company Act 

Release No. 32316 (Oct. 13, 2016) [81 FR 82084 

(Nov. 18, 2016)] (describing liquidity fees under 

rule 2a–7 and the swing factor upper limit under 

rule 22c–1). 

185See Comment Letter of BlackRock on 2015 

ETP Request for Comment (Aug. 11, 2015) (noting 

that suspensions of creations are rare, but an ETF 

could suspend creations when it is unable to 

increase its exposure to underlying assets, such as 

when a non-U.S. market suspends capital inflows). 

186See rule 17a–8(b)(1) (defining ‘‘merger’’ as the 

‘‘merger, consolidation, or purchase or sale of 

substantially all of the assets between a registered 

investment company (or a series thereof) and 

another company’’). 

mechanism and that an ETF would 

establish a size that is appropriate for 

market demand given its investment 

strategies and objectives. Moreover, we 

believe that the conditions in the 

proposed rule designed to promote 

effective arbitrage are better suited for 

that purpose than conditions related to 

creation unit size. 

An ETF generally would issue and 

redeem shares only in creation unit size 

aggregations under the proposed rule. 

However, the proposed rule would 

permit an ETF to sell or redeem 

individual shares on the day of 

consummation of a reorganization, 

merger, conversion or liquidation.181 In 

a merger, for example, an acquired ETF 

typically transfers substantially all of its 

assets to a surviving ETF in exchange 

for interests in the surviving ETF. We 

understand that, under these limited 

circumstances, a surviving ETF may 

need to issue shares, not necessarily in 

creation unit aggregations, to 

shareholders of the acquired ETF 

without utilizing authorized 

participants. Similarly, an ETF may 

need to issue individual shares in 

connection with a reorganization, 

conversion, or liquidation. We also 

understand that the redemptions that 

take place in connection with these 

transactions are generally intended to 

facilitate the transactions themselves 

and compensate individual 

shareholders that may be exiting the 

reorganized, merged, converted or 

liquidated ETF—activities likely to 

involve small cash amounts and to be 

outside the scope of an authorized 

participant’s expected role of 

transacting in creation units. We believe 

that permitting ETFs to conduct 

redemptions with investors other than 

authorized participants in these limited 

circumstances is operationally 

necessary to facilitate reorganizations, 

mergers, conversions or liquidations. 

Permitting ETFs to transact with other 

investors in these limited circumstances 

also is consistent with prior exemptive 

relief, which permits ETF shares to be 

individually redeemable in connection 

with the termination of an ETF.182

An additional issue related to the 

issuance and redemption of ETF shares 

is the extent to which an ETF may 

directly or indirectly suspend these 

processes. An ETF that suspends the 

issuance or redemption of creation units 

indefinitely could cause a breakdown of 

the arbitrage mechanism, resulting in 

significant deviations between market 

price and NAV per share. Such 

deviations may be harmful to investors 

that purchase shares at market prices 

above NAV per share and/or sell shares 

at market prices below NAV per share. 

An ETF may suspend the redemption of 

creation units only in accordance with 

section 22(e) of the Act,183 and an ETF 

may charge transaction fees on creation 

unit redemptions only in accordance 

with 17 CFR 270.22c–2 (‘‘rule 22c– 

2’’).184 In addition, we believe an ETF 

generally may suspend the issuance of 

creation units only for a limited time 

and only due to extraordinary 

circumstances, such as when the 

markets on which the ETF’s portfolio 

holdings are traded are closed for a 

limited period of time.185 We also 

believe that an ETF could not set 

transaction fees so high as to effectively 

suspend the issuance of creation units. 

We request comment on this 

requirement. 

• Should we require, as proposed, 

that an ETF issue (and redeem) creation 

units to (and from) authorized 

participants in exchange for baskets and 

a cash balancing amount if any? Are 

there alternative formulations that we 

should consider? Does this provision 

facilitate the arbitrage mechanism? 

• Should we define ‘‘authorized 

participant’’ as proposed? Should other 

criteria apply? For example, should the 

definition require authorized 

participants to be registered brokerdealers? 

• Instead of amending the definition 

of ‘‘authorized participant’’ in Form 

N–CEN as proposed below in order to 

correspond with proposed rule 6c–11, 

should we use the existing Form N–CEN 

‘‘authorized participant’’ definition for 

rule 6c–11? Should we have the same 

definition of ‘‘authorized participant’’ 

for both rule 6c–11 and Form N–CEN? 

Would different definitions cause 

confusion or operational difficulties? 

• Do commenters agree with our 

understanding that ETFs are not likely 

to have an incentive to set very large or 

very small creation unit sizes that could 

disrupt the arbitrage mechanism? 

• Should we establish requirements 

for creation unit sizes and/or dollar 

amounts? Alternatively, should we 

establish a standard for how ETFs must 

establish creation unit sizes? If so, what 

standard should be established? Do 

differently sized creation units present 

different operational challenges? If so, 

please explain these challenges, and 

provide data to support such a view. 

• Would institutional investors 

engage in more create/redeem 

transactions with an ETF, through an 

authorized participant, if the ETF 

established a smaller creation unit size? 

If so, what are the costs and benefits of 

this result? Would it impact the 

efficiency of the ETF’s arbitrage 

mechanism? If so, how? 

• Should we permit an ETF to sell or 

redeem individual shares on the day of 

consummation of a reorganization, 

merger, conversion or liquidation as 

proposed? Should we define any or all 

of the terms ‘‘reorganization,’’ ‘‘merger,’’ 

‘‘conversion’’ and ‘‘liquidation’’ for 

purposes of this condition? If so, how 

should those terms be defined? For 

example, as an alternative, should we 

consider the definition for ‘‘merger’’ in 

17 CFR 270.17a–8 (‘‘rule 17a–8’’ under 

the Act)? 186 Are there other 

circumstances or transactions that 

should be included within this 

provision? For example, should we 

specify in this provision that shares may 

be issued other than in creation unit 

size aggregations as part of a dividend 

reinvestment program? Is any additional 

relief needed to conduct these 

transactions? Should the relief be 

limited to the day of consummation of 

the transaction, as proposed? Should the 

relief be limited in time at all? Should 

more time be provided? If so, how much 

time? 

• Do commenters generally agree that 

an ETF may suspend creations only in 

limited circumstances? Do commenters 

generally agree that an ETF could not 

set transaction fees so high as to 

effectively suspend the issuance of 


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187Proposed rule 6c–11(a). For purposes of the 

rule, a ‘‘national securities exchange’’ would be 

defined as an exchange that is registered with the 

Commission under section 6 of the Exchange Act. 

188See, e.g., PowerShares Capital Management 

LLC, et al., Investment Company Act Release Nos. 

28140 (Feb. 1, 2008) [73 FR 7328 (Feb. 7, 2008)] 

(notice) and 28171 (Feb. 27, 2008) (order) and 

related application (‘‘PowerShares’’). 

189See 2008 ETF Proposing Release, supra 

footnote 3. 

190See, e.g., NYSE Arca 2008 Comment Letter; 

SSgA 2008 Comment Letter. 

191Based on staff analysis of data obtained from 

Bloomberg, approximately 5% of ETFs do not trade 

on the secondary market on a given trading day. 

192Proposed rule 6c–11 would not apply to 

exchange-traded managed funds (ETMFs), which 

are not ETFs, but rather hybrids between mutual 

funds and ETFs. Unlike ETFs, secondary market 

transactions in ETMFs do not occur at a marketdetermined price. Rather, they occur at the nextdetermined NAV plus or minus a marketdetermined premium or discount that may vary 

during the trading day. See Eaton Vance 

Management, et al., Investment Company Act 

Release Nos. 31333 (Nov. 6, 2014) [79 FR 67471 

(Nov. 13, 2014)] (notice) and 31362 (Dec. 2, 2014) 

(order) and related application. 

193 Indeed, an ETF that does not comply with the 

provisions of the rule would be required to comply 

with the Investment Company Act in all respects 

unless it was relying on other relief. 

194See 2008 ETF Proposing Release, supra 

footnote 3, at text following n.94. 

195BGFA 2008 Comment Letter; ICI 2008 

Comment Letter. 

196See, e.g., NYSE Arca Equities Rule 5.2–E(j)(3), 

Commentary .01(c) (stating that the IIV may be 

based upon ‘‘current information regarding the 

required deposit of securities and cash amount to 

permit creation of new shares of the series or upon 

the index value’’); see also supra footnote 14 and 

accompanying text. The IIV is also sometimes 

referred to as the ‘‘iNAV’’ (indicative net asset 

value) or the ‘‘PIV’’ (portfolio indicative value). 

197See, e.g., 2006 WisdomTree Investments, 

supra footnote 66. 

198 David J. Abner, The ETF Handbook: How to 

Value and Trade Exchange Traded Funds (2010), at 

90 (‘‘Since stock trading now takes place in 

microseconds, a lot can happen between two 

separate 15-second quotes. Professional traders are 

not using the published IIVs as a basis for trading. 

Most, if not all, desks that are trading ETFs are 

calculating their own [NAV of the ETF] based on 

real time quotes . . . that they are generating within 

their own systems.’’). 

199See, e.g., Spruce ETF Trust, et al., Investment 

Company Act Release Nos. 31301 (Oct. 21, 2014) 

[79 FR 63964 (Oct. 27, 2014)] (notice) and 31337 

(Nov. 14, 2017) (order permitting withdrawal of 

application) and related application (withdrawn). 

200See, e.g., Gary Gastineau, How to Minimize 

Your Cost of Trading ETFs, ETF.com (June 22, 

2009), available at http://www.etf.com/ 

publications/journalofindexes/joi-articles/6042- 

how-to-minimize-your-cost-of-trading-etfs.html, at 

Figure 2 and related discussion. See also Comment 

Letter of ICI on NASDAQ proposed rule change 

relating to iNAV pegged orders for ETFs, File No. 

SR–NASDAQ–2012–117 (Nov. 8, 2012), at 4 

(‘‘Professional equity traders operate at speeds 

calculated in fractions of a second. In such markets, 

15 seconds can be an eternity, and establishing an 

order price based on data that is nearly 15 seconds 

old could result in poor execution.’’). 

creation units? Is any additional 

guidance needed? Should we consider 

including provisions in rule 6c–11 that 

would permit ETFs to suspend creations 

or redemptions in particular 

circumstances? 

2. Listing on a National Securities 

Exchange 

Proposed rule 6c–11 defines 

‘‘exchange-traded fund,’’ in part, to 

mean a fund that issues shares that are 

listed on a national securities exchange 

and traded at market-determined 

prices.187 Exchange-listing is one of the 

fundamental characteristics that 

distinguishes an ETF from other types of 

open-end funds (and UITs) and is one 

reason that ETFs need certain 

exemptions from the Act and the rules 

thereunder. The Commission has 

premised all of its previous exemptive 

orders on an ETF listing its shares for 

trading on a national securities 

exchange.188 Listing on an exchange 

provides an organized and continuous 

trading market for the ETF shares at 

market-determined prices. Trading on 

an exchange also is important to a 

functioning arbitrage mechanism. We 

proposed a similar condition in 2008 

that would have required ETF shares to 

be approved for listing and trading on 

a national securities exchange.189

Commenters on the 2008 proposal 

generally agreed that listing on an 

exchange would provide an organized 

and continuous trading market for the 

ETF shares.190

The proposed definition would 

require that the ETF’s shares be traded 

at market-determined prices. Like other 

exchange-traded equity securities, 

however, we understand that there may 

be instances where ETF shares simply 

may not trade for a given period due to 

a lack of market interest.191 This 

proposed requirement is not designed to 

establish a minimum level of trading 

volume for ETFs necessary in order to 

rely on the rule, but rather to 

distinguish ETFs from other products 

that are listed on exchanges, but trade 

at NAV-based prices (i.e., exchangetraded managed funds).192

An ETF that is delisted from a 

national securities exchange would not 

meet the definition of ‘‘exchange-traded 

fund,’’ and would no longer be eligible 

to rely on the proposed rule. Such a 

fund thus would be required to meet 

individual redemption requests within 

seven days pursuant to section 22(e) of 

the Act or liquidate.193 We requested 

comment in the 2008 proposal on 

whether the rule should include an 

exception for ETF shares that are 

delisted for a short time or suspended 

from listing.194 Commenters generally 

did not support such an exception, 

asserting that it would be difficult for 

the Commission to identify all of the 

circumstances in which such an 

exception would be appropriate, and 

recommended that ETFs seek individual 

exemptive relief from the listing 

requirement under these 

circumstances.195 We are not aware of 

any ETF requesting an order that omits 

the requirement that its shares be listed 

on an exchange. Therefore, we do not 

propose to include an exemption for 

ETFs whose shares are suspended or 

delisted. 

We request comment on this 

requirement. 

• Should the rule make allowance for 

shares that are delisted for a short time, 

or for halts or suspensions in trading? If 

so, how would the arbitrage mechanism 

function in these circumstances? 

3. Intraday Indicative Value 

Exchange listing standards include a 

requirement that an intraday estimate of 

an ETF’s NAV per share (an ‘‘intraday 

indicative value’’ or ‘‘IIV’’) be widely 

disseminated at least every 15 seconds 

during regular trading hours (60 seconds 

for international ETFs).196 Our orders 

also require the dissemination of the 

IIV, and ETFs have stated in their 

exemptive applications that an ETF’s 

IIV is useful to investors because it 

allows them to determine (by comparing 

the IIV to the market value of the ETF’s 

shares) whether and to what extent the 

ETF’s shares are trading at a premium 

or discount.197 We are not proposing, 

however, to require the dissemination of 

an ETF’s IIV as a condition of the 

proposed rule. We understand that 

market makers today typically calculate 

their own intraday value of an ETF’s 

portfolio with proprietary algorithms 

that use an ETF’s daily portfolio 

disclosure and available pricing 

information about the assets held in the 

ETF’s portfolio.198 We further 

understand that they generally use the 

IIV, if at all, as a secondary or tertiary 

check on the value that their proprietary 

algorithms generate.199

We believe that the IIV is no longer 

used by market participants when 

conducting arbitrage trading. In today’s 

fast-moving markets, 15 seconds is 

likely too long for purposes of efficient 

market making and could result in poor 

execution.200 An ETF’s current value 

changes every time the value of any 

underlying component of the ETF 

portfolio changes. Therefore, the IIV for 

a more frequently traded component 

security might not effectively take into 

account the full trading activity for that 

security, despite being available every 

15 seconds. In particularly volatile 


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201See Understanding iNAV, ETF.com, available 

at http://www.etf.com/etf-education-center/21028- 

understanding-inav.html http://www.etf.com/etfeducation-center/21028-understandinginav.html?nopaging=1; Gary Gastineau, ExchangeTraded Funds Manual, 2nd Ed. (2010), at 200–202. 

202Section 2(a)(41)(B) of the Act defines ‘‘value’’ 

as: ‘‘(i) with respect to securities for which market 

quotations are readily available, the market value of 

such securities; and (ii) with respect to other 

securities and assets, fair value as determined in 

good faith by the board of directors.’’ This 

definition also is used in rule 2a–4 under the Act 

as the required basis for computing a fund’s current 

NAV per share. With daily portfolio disclosure, 

market participants can estimate fair value on their 

own for the holdings of current ETFs. 15 U.S.C. 

80a–2(a)(41)(B). 

203See BGFA 2008 Comment Letter; Xshares 2008 

Comment Letter. 

204See Schwab ETP Comment Letter, supra 

footnote 115, at 7 (‘‘[A]s the ETF marketplace has 

expanded into such markets as fixed income, 

precious metals, and foreign securities the 

published data points can be potentially misleading 

when the reference asset the ETF is covering is not 

open for pricing or transactions . . . [t]he 

requirement for publication of the IIV every 15 

seconds seems antiquated in the evolving electronic 

trading world in which we are currently immersed. 

Trading now occurs in micro and nano seconds and 

the lag between the published IIV value and real 

time quoting and trading has essentially made the 

calculation of limited worth even when the 

reference asset is open for pricing.’’); Comment 

Letter of Eaton Vance Corp. to Request for Comment 

on Exchange-Traded Products (File No. S7–11–15) 

(Aug. 17, 2015) (stating that the IIV is ‘‘frequently 

highly misleading’’ as an indicator of current fund 

value and investor trading costs); see also John 

Spence, ETFs Unfairly Blamed in Recent Market 

Drama, USA Today (June 27, 2013), available at 

https://www.usatoday.com/story/money/ 

personalfinance/2013/06/27/etfs-criticisminvesting/2464741/ (‘‘[I]t’s meaningless to compare 

the share price of any international equity ETF with 

a stale NAV based on stock prices that are several 

hours old.’’). 

205See supra section I.B. 

206See Stanislav Dolgopolov, Regulating 

Merchants of Liquidity: Market Making From 

Crowded Floors to High Frequency Trading, 18 U. 

of Penn Journal of Business Law 3 (2016), at 652 

(‘‘[T]he distinguishing feature of a market maker is 

being ‘pretty well always even.’’’). 

207Exemptive orders for actively managed ETFs 

and recent orders for index-based ETFs with an 

affiliated index provider have required full portfolio 

transparency. Exemptive orders for index-based 

ETFs with an unaffiliated index provider have 

required publication of the ETF’s baskets. 

markets, the dissemination lag of the IIV 

may not reflect the actual value of the 

ETF.201

The IIV also may not reflect the actual 

value of an ETF that holds securities 

that do not trade frequently. For 

example, the IIV can be stale or 

inaccurate for ETFs with foreign 

securities or less liquid debt 

instruments. For such ETFs, there may 

be a difference in value between the IIV, 

which is constructed using the last 

available market quotations or stale 

prices, and the ETF’s NAV, which uses 

fair value when market quotations are 

not readily available.202 Moreover, 

because there currently are no uniform 

methodology requirements, the IIV can 

be calculated in different, and 

potentially inconsistent, ways. 

Several commenters to the 2008 ETF 

Proposing Release, which would have 

included an IIV dissemination 

requirement, agreed that market 

professionals no longer rely on the 

exchange-published IIV.203 Commenters 

on the 2015 ETP Request for Comment 

also stated that the IIV is not always 

reliable, and in some cases is 

misleading, particularly when the 

underlying holdings are less liquid, or, 

in the case of certain international ETFs, 

not traded during the same hours as the 

ETF shares.204

As discussed below, we are proposing 

that rule 6c–11 condition its relief on 

the daily disclosure of portfolio 

holdings. We believe that this disclosure 

would promote the availability of 

information to market participants to 

support their ability to calculate an 

estimated intraday value of the ETF’s 

portfolio holdings using their own 

methodologies. Therefore, the proposed 

rule would not include a requirement 

for IIV dissemination. 

We request comment on this aspect of 

our proposal. 

• Should proposed rule 6c–11 

condition relief on dissemination of the 

IIV? If so, who should be required to 

disseminate the IIV? The national 

securities exchange on which the ETF is 

listed? Other entities? 

• Are we correct in our 

understanding that market participants 

today typically calculate their own 

intraday values of an ETF portfolio by 

utilizing proprietary algorithms? 

• Do market participants use the 

published IIV for any purpose, whether 

or not related to its original purpose of 

facilitating arbitrage? For example, do 

some market participants use the IIV as 

a secondary or tertiary check on their 

internal calculations of an ETF’s 

intraday value? 

• Do retail investors use or rely on the 

IIV, and if so, how? Do they use the IIV 

for international and fixed-income 

ETFs, and if so, how? Is there a risk that 

this information could be misleading in 

certain circumstances? Would omitting 

the IIV have a disparate impact on retail 

investors as opposed to more 

sophisticated market participants? 

• Do the published IIVs provide an 

accurate indication of the value of ETFs’ 

underlying holdings? Does the answer 

vary depending on the type of the ETF’s 

underlying holdings? If we were to 

include a requirement to disseminate 

the IIV, should and can changes be 

made to improve its accuracy? For 

example, should we require that the IIV 

be disseminated at more frequent 

intervals? If so, how frequently (e.g., 

every second, every five seconds)? 

Should we require that the IIV be 

disseminated for all ETFs or only 

specific types of ETFs? 

• If we were to include an IIV 

requirement, should we establish a 

uniform method for calculation of the 

IIV for all ETFs relying on the rule? If 

so, what should that method take into 

account? How should fair valued 

securities be treated? Alternatively, 

should we prescribe methodologies for 

ETFs based on the types of portfolio 

holdings? 

• If the IIV is no longer required 

pursuant to exemptive relief or 

regulation, would ETFs continue to 

publish this information? If so, should 

we require ETFs that voluntarily 

disseminate the IIV to follow certain 

prescribed methodologies? For example, 

should we require that these ETFs 

disseminate the IIV more frequently? If 

so, how frequently? 

4. Portfolio Holdings 

As discussed above, since the first 

exemptive order for an ETF, the 

Commission has relied on the existence 

of an arbitrage mechanism to keep the 

market prices of ETF shares at or close 

to the NAV per share of the ETF.205 One 

mechanism that facilitates the arbitrage 

mechanism is daily portfolio 

transparency. Portfolio transparency 

provides authorized participants and 

other market participants with an 

important tool to facilitate valuing the 

ETF’s portfolio on an intraday basis, 

which, in turn, would enable them to 

assess whether arbitrage opportunities 

exist. It also provides information 

necessary to hedge the ETF’s portfolio. 

The ability to hedge is important 

because market makers generally trade 

to provide liquidity, balance supply and 

demand, and profit from arbitrage 

opportunities (without seeking to profit 

from taking a directional position in a 

security).206 Without the ability to 

hedge, market makers may widen 

spreads or be reluctant to make markets 

because doing so may require taking on 

greater market risk than the firm is 

willing to bear. For this reason, to 

facilitate the ability of market makers to 

make markets in ETF shares, our 

exemptive orders have historically 

required ETFs to provide a certain 

degree of daily transparency.207

Furthermore, Commission staff has 

observed that all ETFs that could rely on 

the proposed rule currently provide full 

transparency as a matter of industry 

market practice. 


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208Proposed rule 6c–11(c)(1)(i)(A). See also 

proposed rule 6c–11(a) (defining the term ‘‘portfolio 

holdings’’ to mean the securities, assets, or other 

positions held by the ETF). For purposes of this 

proposed requirement, as well as other 

requirements to disclose information on a publicly 

available website under proposed rule 6c–11, we 

believe that an ETF should not establish restrictive 

terms of use that would effectively make the 

disclosures unavailable to the public or otherwise 

difficult to locate. For example, the proposed 

required website disclosure should be easily 

accessible on the website, presented without 

encumbrance by user name, password, or other 

access constraints, and should not be subject to 

usage restrictions on access, retrieval, distribution 

or reuse. We also would encourage ETFs to consider 

whether there are technological means to make the 

disclosures more accessible. For example, today, 

ETFs could include the portfolio holdings 

information in a downloadable or machine-readable 

format, such as comma-delimited or similar format. 

209For these purposes, ‘‘business day’’ is defined 

as any day the ETF is open for business, including 

any day when it satisfies redemption requests as 

required by section 22(e) of the Act. See proposed 

rule 6c–11(a). 

210See proposed rule 6c–11(c)(2). Pursuant to this 

condition, an ETF would not be permitted to reflect 

portfolio changes on a T+0 basis, notwithstanding 

the ability to do so under rule 2a–4 under the Act. 

211See, e.g., Morgan Stanley ETF Trust, et al., 

Investment Company Act Release Nos. 32484 (Feb. 

21, 2017) [82 FR 11956 (Feb. 27, 2017)] (notice) and 

32539 (Mar. 21, 2017) (order) and related 

application (‘‘Morgan Stanley’’). 

212 In the event the ETF tracks multiple indexes, 

the 2008 ETF Proposing Release would have 

permitted an ETF to provide full transparency like 

actively managed funds. See 2008 ETF Proposing 

Release, supra footnote 3. 

213See, e.g., BGFA 2008 Comment Letter. 

214See, e.g., ICI 2008 Comment Letter. See also 

Vanguard 2008 Comment Letter (opposing index 

transparency (as well as daily portfolio holdings 

disclosure) for index-based ETFs, voicing concerns 

about front running in the context of index-based 

ETFs). 

215Commenters asserted that compliance with the 

index transparency requirement we proposed in 

2008 would be difficult for ETFs that have licensing 

rights to an index that may preclude them from 

publicly disclosing the components of the index. 

See, e.g., NYSE Arca 2008 Comment Letter; 

Comment Letter of Russell Investments (Aug. 27, 

2008). Today, Commission staff, through 

conversations with ETF industry participants, 

understands the preference for this basket 

transparency approach to be significantly lessened. 

216See supra section II.A.2. 

217See, e.g., Ben Johnson, Assessing the Total 

Cost of ETF Ownership, Morningstar Advisor (Apr. 

12, 2017), available at http://beta.morningstar.com/ 

articles/802211/assessing-the-total-cost-of-etfownership.html. 

a. Transparency of Portfolio Holdings 

Proposed rule 6c–11 would require an 

ETF to disclose prominently on its 

website, which is publicly available and 

free of charge, the portfolio holdings 

that will form the basis for each 

calculation of NAV per share.208 The 

portfolio holdings disclosure must be 

made each business day before the 

opening of regular trading on the 

primary listing exchange of the ETF’s 

shares and before the ETF starts 

accepting orders for the purchase or 

redemption of creation units.209 For 

portfolio transparency to facilitate 

effective arbitrage, authorized 

participants or other market participants 

buying or selling ETF shares, whether 

on the secondary market or in a primary 

transaction, should have access to 

portfolio composition information at the 

time of the transaction. The proposed 

rule’s timing requirements, therefore, 

are designed to prevent an ETF from 

disclosing its portfolio holdings only 

after the beginning of trading or after the 

ETF has begun accepting orders for the 

next business day. 

In addition, the proposed rule would 

require the portfolio holdings that form 

the basis for the ETF’s NAV calculation 

to be the ETF’s portfolio holdings as of 

the close of business on the prior 

business day.210 Changes in an ETF’s 

holdings of portfolio securities would 

therefore be reflected on a T+1 basis. 

This condition is consistent with 

current ETF practices and enables an 

ETF to disclose at the beginning of the 

business day the portfolio that will form 

the basis for the next NAV calculation, 

helping to facilitate the efficient 

functioning of the arbitrage process.211

We believe that portfolio transparency 

is an effective means to facilitate the 

arbitrage mechanism. As noted above in 

our discussion of the IIV, authorized 

participants and other market 

participants today calculate the value of 

an ETF’s net assets with proprietary 

algorithms that use an ETF’s daily 

portfolio disclosure and available 

pricing information about the assets 

held in the ETF’s portfolio on an 

ongoing basis during the course of the 

trading day. This information allows 

market participants to identify instances 

where an arbitrage opportunity exists 

and to effectively hedge their positions. 

The 2008 proposal would have 

required actively managed ETFs to 

disclose the identities and weightings of 

the portfolio securities and other assets 

held by the ETF on the ETF’s website 

each business day (i.e. full portfolio 

transparency). By contrast, index-based 

ETFs would have been required to have 

a stated investment objective of 

obtaining returns that correspond to the 

returns of a securities index, whose 

provider discloses on its website the 

identities and weightings of the 

component securities and other assets of 

the index (i.e. index transparency).212

Commenters on that proposal generally 

concurred with the importance of 

transparency to the arbitrage mechanism 

and supported including a transparency 

requirement in the proposed rule.213

Some commenters, however, asserted 

that index transparency may not be 

effective for ETFs whose portfolios 

sample an index or include holdings in 

proportions that are different from those 

in the index.214 These commenters 

urged the Commission to consider 

alternative approaches, including 

permitting index-based ETFs to 

disseminate the identities and 

weightings of the securities in the 

basket, if the basket is a representative 

sample of the portfolio.215

We are proposing to require full 

transparency for all ETFs under this rule 

rather than proposing alternative 

transparency requirements for indexbased ETFs or actively managed 

ETFs.216 We generally agree with 

commenters on the 2008 proposal that 

portfolio transparency provides more 

detailed information than the index 

alone when an index-based ETF utilizes 

sampling techniques or holds 

derivatives or other instruments and, as 

noted above, all ETFs that could rely on 

the proposed rule already provide full 

portfolio transparency as a matter of 

market practice. Full portfolio 

transparency also may be useful for 

investors when they are determining the 

efficacy of an index-based ETF tracking 

a particular index because performance 

of two ETFs tracking the same index can 

differ based on sampling practices.217

Similarly, where the primary 

information used to support the 

arbitrage mechanism is information 

about holdings, full portfolio 

transparency may be more helpful to 

market makers modelling ETFs that seek 

to track highly customized or bespoke 

indexes. 

We seek comment on the portfolio 

transparency condition of the proposed 

rule. 

• Should the rule include other 

transparency options? For example, 

should we have different transparency 

requirements for index-based ETFs and 

actively managed ETFs, similar to those 

proposed in 2008? Would disclosure of 

an index’s constituents alone provide 

detailed enough information to allow 

market participants to effectively hedge 

the ETF’s portfolio when an index-based 

ETF utilizes sampling techniques or 

holds derivatives or other instruments? 

Do index providers make information 

about index constituents easily 

accessible today? Are there other 

alternatives we should consider? For 

example, would disclosure of an ETF’s 

basket provide a basis for effective 

hedging? In setting forth an option, 

please explain how your proposed level 

of transparency would allow effective 

arbitrage. 


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218See proposed rule 6c–11(a). 

219Under the proposed rule, for example, an ETF 

would have to disclose that it entered into a written 

call option, under which it would sacrifice 

potential gains that would result from the price of 

the reference asset increasing above the price at 

which the call may be exercised (i.e., the strike 

price). Unless the ETF discloses the presence of 

these and similar liabilities, authorized participants 

and other investors may not be able to fully 

evaluate the portfolio’s exposure. 

220See 17 CFR 210.12–12, 210.12–12A, 210.12– 

13, 210.12–13A, 210.12–13B, 210.12–13C, and 

210.12–13D. For investments in securities, 

securities sold short, and other investments, this 

would include the name of issuer and title of issue 

(as prescribed within the S–X schedules including 

any related footnotes on the description columns), 

balance held at close of period, number of shares, 

principal amount of bonds, and value of each item 

at close of period. For derivatives, this would 

include the description (as prescribed within the S– 

X schedules including any related footnotes), 

number of contracts, value, expiration date (as 

applicable), unrealized appreciation/depreciation 

(as applicable), and amount and description of 

currency to be purchased and to be sold (as 

applicable). 

221We recognize that the generic listing standards 

for actively managed ETFs also currently require 

website disclosure of the ticker, CUSIP, description 

of the holding, and percentage of net assets for each 

portfolio holding. See NYSE Arca Rule 8.600– 

E(c)(2); Nasdaq Rule 5735(c)(2); Cboe BZX Rule 

14.11(i)(3)(B). 

222See supra footnote 208. None of our exemptive 

orders has required advance disclosure of intraday 

changes in the portfolio of the ETF or advance 

disclosure of portfolio trades. Instead, our orders 

have required ETFs to use the prior business day’s 

portfolio holdings. 

223Compliance Programs of Investment 

Companies and Investment Advisers, Investment 

Company Act Release No. 26299 (Dec. 17, 2003) [68 

FR 74714 (Dec. 24, 2003)] (‘‘Rule 38a–1 Adopting 

Release’’). ETFs typically disclose (and would be 

required to disclose pursuant to proposed rule 6c– 

11) portfolio holdings information with greater 

frequency than other open-end funds, which are 

generally required to publicly disclose holdings on 

a quarterly basis. 

• Are there any circumstances that 

would prevent an index-based ETF from 

disclosing its portfolio holdings? 

• Are we correct that all ETFs that 

could rely on the proposed rule 

currently provide full transparency as a 

matter of market practice? 

• Would publicly available website 

disclosure of portfolio holdings be an 

effective way to convey this 

information? If not, what other means of 

disclosure should the rule require or 

permit? For example, should we allow 

ETFs to comply with the transparency 

condition by transmitting a portfolio 

composition file or ‘‘PCF’’ to a central 

clearing facility? Would this method 

provide information to enough market 

participants to facilitate the arbitrage 

mechanism? Would it give fair and 

equal access to all market participants? 

Should we require ETFs to provide 

daily portfolio holdings information to 

the Commission through other means, 

such as filing on EDGAR? 

• Should proposed rule 6c–11 define 

‘‘publicly available’’ for purposes of the 

website disclosure requirements? If so, 

what definition should we use? For 

example, should the rule require that all 

information publicly posted on a 

website pursuant to rule 6c–11 be and 

remain freely and persistently available 

and easily accessible by the general 

public on the ETF’s website and that the 

information must be presented in an 

easily accessible manner, without 

encumbrance, and must not be subject 

to any restrictions, including 

restrictions on access, retrieval, 

distribution and reuse? 

• Should we require ETFs to reflect 

changes in portfolio holdings no earlier 

than a T+1 basis as proposed? Is this 

condition necessary? 

• Should we define ‘‘business day’’ as 

proposed or are there alternative 

definitions we should consider? Do 

commenters believe that ETFs are likely 

to calculate NAV per share more than 

once each business day in the future? If 

so, would a ‘‘business day’’ standard 

cause compliance challenges with the 

portfolio holdings disclosure 

requirements? 

• Should the rule require that 

portfolio holdings disclosure be 

provided before the opening of regular 

trading on the primary listing exchange 

of the ETF’s shares and before the ETF 

starts accepting orders for the purchase 

or redemption of creation units? 

Alternatively, should the rule exclude 

timing requirements? Are there 

operational issues that would make 

compliance with the timing 

requirements challenging or costly? 

• Should we consider exemptions for 

ETFs with non-transparent or partially 

transparent portfolios as part of 

proposed rule 6c–11? Would a rule of 

general applicability be the appropriate 

means to provide an exemption for ETFs 

using a novel arbitrage mechanism? 

b. Disclosure of Securities, Assets or 

Other Investment Positions 

The proposed rule would require 

ETFs to disclose on their websites all 

portfolio holdings that will form the 

basis for the ETF’s next calculation of 

NAV per share. Under the proposed 

rule, the term ‘‘portfolio holdings’’ is 

defined to mean an ETF’s securities, 

assets, or other positions.218 As a result, 

an ETF would be required to disclose its 

cash holdings, as well as holdings that 

are not securities or assets, including 

short positions or written options.219

We believe that this approach would 

provide more consistent and 

comprehensive information regarding 

an ETF’s portfolio holdings compared to 

other means of disclosure, allowing 

market participants to fairly and 

effectively value the entirety of the 

ETF’s portfolio holdings. We believe 

this, in turn, would facilitate the 

arbitrage mechanism by allowing 

authorized participants and other 

market participants to more effectively 

hedge their exposure to a particular 

ETF. 

In order to standardize the manner in 

which portfolio holdings are presented 

on the ETF’s website, the proposed rule 

would require that portfolio holdings 

information be presented and contain 

information regarding description, 

amount, value and/or unrealized gain/ 

loss (as applicable) in the manner 

prescribed within 17 CFR 210.12–12, 

210.12–12A, 210.12–13, 210.12–13A, 

210.12–13B, 210.12–13C, and 210.12– 

13D (‘‘Article 12 of Regulation S–X’’), 

which sets forth the form and content of 

fund financial statements.220 This 

framework should be efficient for such 

disclosure because ETFs already comply 

with it for financial reporting purposes 

and track the relevant information for 

daily NAV calculations. Based on a staff 

review of ETF websites, there is 

currently little consistency regarding 

how portfolio holdings information is 

presented, particularly with respect to 

derivatives. We believe that this 

inconsistency may lead to investor 

confusion.221

The proposed rule would not require 

disclosure of intraday changes in the 

portfolio holdings of the ETF or advance 

disclosure of portfolio trades because 

changes in holdings would not affect the 

composition of the ETF’s portfolio that 

serves as a basis for NAV calculation 

until the next business day.222 The 

selective disclosure of nonpublic 

information regarding intraday changes 

in portfolio holdings and advance 

disclosure of portfolio trades, however, 

could result in the front-running of an 

ETF’s trades, causing the ETF to pay 

more to obtain a security. We have 

stated that registered investment 

companies’ compliance policies and 

procedures required by 17 CFR 38a–1 

(‘‘rule 38a–1’’ under the Act) should 

address potential misuses of nonpublic 

information, including the disclosure to 

third parties of material information 

about a fund’s portfolio, its trading 

strategies, or pending transactions, and 

the purchase or sale of fund shares by 

advisory personnel based on material, 

nonpublic information about the fund’s 

portfolio.223 ETFs are also required to 

describe their policies and procedures 

on portfolio security disclosure in the 

Statement of Additional Information 

and post such policies and procedures 


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224See Items 9(d) and 16(f) of Form N–1A; see 

also Disclosure Regarding Market Timing and 

Selective Disclosure of Portfolio Holdings, 

Investment Company Act Release No. 26418 (Apr. 

20, 2004) [69 FR 22299 (Apr. 23, 2004)] 

(‘‘Disclosure of Portfolio Holdings Release’’), at 

section II.C. 

225See Disclosure of Portfolio Holdings Release, 

supra footnote 224, at section II.C. 

226 Id. 

227See, e.g., Interpretive Release Concerning the 

Scope of Section 28(e) of the Securities Exchange 

Act of 1934 and Related Matters, Exchange Act 

Release No. 34–23170 (Apr. 28, 1986), at section V 

(discussing obligation of money manager to obtain 

best execution of client transactions). 

228 17 CFR 243. 

229Regulation FD does not apply to investment 

companies, other than closed-end funds. The 

releases proposing and adopting Regulation FD do 

not specifically discuss ETFs. See Selective 

Disclosure and Insider Trading, Investment 

Company Act Release No. 24209 (Dec. 20, 1999) [64 

FR 72590 (Dec. 28, 1999)] (proposing release), at 

paragraph preceding n.54 (‘‘Investment companies 

that are continually offering their securities to the 

public already are required to update their 

prospectuses to disclose material changes 

subsequent to the effective date of the registration 

statement or any post-effective amendment, and are 

not permitted to sell, redeem, or repurchase their 

securities except at a price based on their securities’ 

net asset value. While we believe that Regulation 

FD would offer little additional protection to 

investors in these types of investment companies 

and therefore they should be excluded from its 

coverage, these considerations do not apply in the 

case of closed-end investment companies.’’). See 

also Selective Disclosure and Insider Trading, 

Investment Company Act Release No. 24599 (Aug. 

15, 2000) [65 FR 51716 (Aug. 24, 2000)] (adopting 

release). 

230See proposed rule 6c–11(c)(3). The proposed 

rule would define ‘‘basket’’ to mean the securities, 

assets or other positions in exchange for which an 

ETF issues (or in return for which it redeems) 

creation units. See proposed rule 6c–11(a). 

231See proposed rule 6c–11(c)(1)(i)(B). 

232See, e.g., proposed rule 6c–11(c)(2). 

on their websites.224 As we noted in the 

release adopting these disclosures, a 

fund or investment adviser that 

discloses the fund’s portfolio securities 

may only do so consistent with the 

antifraud provisions of the federal 

securities laws and the adviser’s 

fiduciary duties.225 Moreover, divulging 

nonpublic portfolio holdings to selected 

third parties is permissible only when 

the fund has legitimate business 

purposes for doing so and the recipients 

are subject to a duty of confidentiality, 

including a duty not to trade on the 

nonpublic information.226

We seek comment on this aspect of 

the proposed rule. 

• Should we require ETFs to present 

the description, amount, value and 

unrealized gain/loss in the manner 

prescribed within Article 12 of 

Regulation S–X? Would such a 

presentation be more or less effective in 

disclosing portfolio holdings 

information than current website 

disclosure practices for ETFs? Do 

investors use current portfolio holding 

disclosures? Do current disclosure 

practices regarding portfolio holdings 

result in investor confusion? For 

example, do investors find the lack of 

consistency around the presentation of 

derivatives holdings confusing? 

• Should we consider excluding any 

of the requirements in Article 12 of 

Regulation S–X? For example, is 

information regarding unrealized gain 

and loss useful for all ETFs? Should we 

only require that disclosure for ETFs 

that transact with authorized 

participants on a cash basis? Will 

disclosure of non-securities investment 

positions and assets permit investors, 

particularly authorized participants and 

other market participants engaged in 

arbitrage activities, to assess the full 

scope of the ETF’s portfolio holdings? 

• Is there any additional or 

alternative holdings information that we 

should require ETFs to disclose on their 

websites? For example, should we 

require daily disclosure regarding the 

ticker, CUSIP, or other identifier; subcategories of holdings; and the 

percentage of net assets for each 

holding? 

• Should ETFs be required to disclose 

all liabilities as part of their portfolio 

holding disclosure? For example, would 

disclosure of bank borrowings allow 

authorized participants and other 

market participants to evaluate the 

impact of leverage from these types of 

borrowings on the ETF’s portfolio? How 

would the arbitrage mechanism work 

without this disclosure? 

• Would the presentation 

requirements facilitate clear and 

uniform disclosure? Are there 

alternative presentation requirements 

we should consider? If so, what would 

those requirements be? 

• The proposed rule would not 

require disclosure of intraday changes 

in the portfolio holdings of the ETF or 

advance disclosure of portfolio trades 

because changes in holdings would not 

affect the composition of the ETF’s 

portfolio that serves as a basis for NAV 

calculation until the next business day. 

Should we require ETFs to disclose 

intraday changes in the portfolio or 

require advance disclosure of portfolio 

trades? Would such disclosure 

requirements improve transparency in a 

meaningful way? Would such disclosure 

requirements be costly to implement? 

Would an ETF or its investors suffer any 

harm if such information were 

disclosed? If so, how? 

• Should we require ETFs to maintain 

portfolio holdings disclosure on their 

websites for periods longer than one 

day? If so, for how long (e.g., 30 days)? 

• ETFs trade in both portfolio assets 

(e.g., when rebalancing) and creation 

units (when transacting with authorized 

participants). Does this raise any 

execution issues for ETFs? For example, 

how do ETFs prevent certain 

counterparties from receiving 

preferential treatment? 227 Are the 

policies and procedures noted above 

adequate to protect nonpublic 

information from misuse by authorized 

participants and other market 

participants that have access to ETF 

sensitive trade data? For example, how 

do ETFs ensure that authorized 

participants are not trading ahead of 

ETF rebalancing trades or other changes 

to its portfolio? Are there other 

requirements that we should adopt to 

protect ETFs and their investors? For 

example, should an ETF be required to 

maintain communications (including 

electronic communications) with its 

authorized participants? 

• ETFs currently are not subject to 

Regulation FD, which prohibits the 

selective disclosure of information by 

publicly traded companies and other 

issuers.228 Should we amend Regulation 

FD to apply to ETFs given that any 

information that is selectively disclosed 

may be immediately used to trade ETF 

shares (or the ETF’s portfolio holdings) 

on the secondary market and given the 

proposed relief from section 17(a) for 

affiliated transactions? 229

5. Baskets 

Proposed rule 6c–11 would require 

each ETF relying on the rule to adopt 

and implement written policies and 

procedures governing the construction 

of baskets and the process that would be 

used for the acceptance of baskets.230 In 

addition, the proposed rule would 

provide an ETF with the flexibility to 

use ‘‘custom baskets’’ if the ETF has 

adopted written policies and procedures 

setting forth detailed parameters for the 

construction and acceptance of custom 

baskets that are in the best interests of 

the ETF and its shareholders. The 

proposed rule also would require an 

ETF to disclose prominently on its 

website, which is publicly available and 

free of charge, information regarding a 

published basket that will apply to 

orders for the purchase or redemption of 

creation units each business day.231 We 

believe that the conditions we are 

proposing related to baskets would 

provide ETFs with the ability to 

customize baskets in circumstances that 

would benefit the ETF and its investors, 

while at the same time putting in place 

protections against the potential for 

authorized participants to overreach by 

dictating the composition of baskets to 

the detriment of other ETF investors.232


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233See supra section I.B. 

234See, e.g., SPDR, supra footnote 34. 

235See supra section II.A.1. A UIT ETF could 

substitute cash for basket assets in certain limited 

circumstances. See, e.g., SPDR, supra footnote 34. 

236See WEBs Index Fund, Inc., et al., Investment 

Company Act Release Nos. 23860 (June 7, 1999) [64 

FR 31658 (June 11, 1999)] (notice) and 23890 (July 

6, 1999) (order) and related application. 

237See, e.g., 2006 WisdomTree Investments, 

supra footnote 66; see also infra footnote 245 and 

accompanying paragraph. 

238See 2006 WisdomTree Investments, supra 

footnote 66 (‘‘[I]n limited circumstances and only 

when doing so would be in the best interest of a 

Fund as determined by the Advisor or Subadvisor, 

each Fund may designate Deposit Securities that 

may not be an exact pro rata reflection of such 

Fund’s Portfolio Securities. For example, a Fund 

might designate a non-pro rata basket of Deposit 

Securities if one or more Portfolio Securities were 

not readily available, or in order to facilitate or 

reduce the costs associated with a rebalancing of a 

Fund’s portfolio in response to changes in its 

Underlying Index.’’). 

239See, e.g., Nationwide Fund Advisors, et al., 

Investment Company Act Release Nos. 32727 (July 

6, 2017) [82 FR 32214 (July 12, 2017)] (notice) and 

32771 (Aug. 1, 2017) (order) and related 

application. 

240 Id. In the TBA market, lenders enter into 

forward contracts to sell agency mortgage-backed 

securities and agree to deliver such securities on a 

settlement date in the future. The specific agency 

mortgage-backed securities that will be delivered in 

the future may not yet be created at the time the 

forward contract is entered into. The purchaser will 

contract to acquire a specified dollar amount of 

mortgage-backed securities, which may be satisfied 

when the seller delivers one or more mortgagebacked securities pools at settlement. See LRM 

Adopting Release, supra footnote 101, at n.381. 

241See Morgan Stanley, supra footnote 211. In 

this context, representative sampling means that the 

ETF’s baskets do not reflect a pro rata 

representation of the ETF’s portfolio but contain 

assets from the ETF’s portfolio that have been 

determined by the ETF to constitute a 

representative sample of the portfolio. See id. Our 

exemptive orders have expressly limited the 

circumstances under which the ETF may use 

representative sampling to select its basket assets: 

(i) The sample must be designed to generate 

performance that is highly correlated to the 

performance of the ETF’s portfolio; (ii) the sample 

must consist entirely of instruments that are already 

included in the ETF’s portfolio; and (iii) the sample 

must be the same for all authorized participants on 

a given business day. See id. 

242See, e.g., J.P. Morgan Exchange-Traded Fund 

Trust, et al., Investment Company Act Release Nos. 

30898 (Jan. 30, 2014) [79 FR 6941 (Feb. 5, 2014)] 

(notice) and 30927 (Feb. 25, 2014) (order) and 

related application. These orders also generally 

require an ETF to use the same basket for both 

purchases and redemptions on a particular business 

day, subject to certain exceptions. See, e.g., id. 

243See, e.g., 2006 WisdomTree Investments, 

supra footnote 66. 

244See, e.g., ProShares Trust, et al., Investment 

Company Act Release Nos. 27975 (Sept. 21, 2007) 

[72 FR 55257 (Sept. 28, 2007)] (notice) and 28014 

(Oct. 17, 2007) (order) and related application. 

a. Basket Flexibility 

Where an ETF uses in-kind creations 

and redemptions, the composition of the 

basket is an important aspect of the 

efficient functioning of the arbitrage 

mechanism.233 Basket composition 

affects the costs of assembling and 

delivering the baskets that will be 

exchanged for creation units as well as 

the costs of liquidating basket securities 

when redeeming creation units. For 

example, the number of positions 

included in a basket, as well as the 

difficulty and cost of trading those 

positions, will affect the cost of basket 

transactions. A basket with hundreds of 

relatively small positions may prove 

less efficient than a basket with fewer 

positions. 

Basket composition also is important 

to ETF portfolio management. Each inkind creation or redemption increases or 

decreases positions in the ETF’s 

portfolio. Managing the composition of 

a basket allows the ETF to add certain 

instruments to its portfolio during the 

creation process (by including those 

securities in the basket that it will 

accept in exchange for a creation unit), 

or, conversely, to remove certain 

portfolio holdings during the 

redemption process (by including them 

in a redemption basket while not 

accepting them in the creation unit). 

This can be an efficient way for a 

portfolio manager to execute changes in 

the ETF’s portfolio because the manager 

can make the changes without incurring 

the additional expenses of trades in the 

market. When an ETF does not have 

flexibility to manage basket 

composition, however, it may result in 

undesired changes to the portfolio, such 

as the loss of desirable bonds when 

paying redemptions in kind. 

The exemptive relief we have 

provided ETFs relating to baskets has 

evolved over time. Our earliest ETF 

orders for index-based ETFs organized 

as UITs provided that in-kind purchases 

of creation units were to be made using 

a basket of securities substantially 

similar to the composition and 

weighting of the ETF’s underlying 

index.234 Given the unmanaged nature 

of the UIT structure, a UIT ETF’s basket 

generally reflected a pro rata 

representation of the ETF’s portfolio.235

Early orders for ETFs organized as 

open-end funds included few explicit 

restrictions on baskets, and these orders 

did not expressly limit ETFs’ baskets to 

a pro rata representation of the ETF’s 

portfolio holdings.236 Since 

approximately 2006, however, as the 

ETF industry grew and the Commission 

gained more experience with ETFs, our 

exemptive orders have placed tighter 

restrictions on ETFs’ composition of 

baskets.237 These orders expressly 

require that the ETF’s basket generally 

correspond pro rata to its portfolio 

holdings, while identifying certain 

limited circumstances under which an 

ETF may use a non-pro rata basket.238

Our recent exemptive orders, for 

example, permit ETFs to use baskets 

that do not correspond pro rata to the 

ETF’s portfolio holdings when it is 

impossible to break up bonds beyond 

certain minimum sizes needed for 

transfer and settlement or where 

rounding is necessary to eliminate 

fractional shares.239 The orders have 

allowed baskets to deviate from a pro 

rata representation where the basket 

includes positions that cannot be 

transferred in kind, such as ‘‘to be 

announced’’ transactions (‘‘TBA 

transactions’’), short positions, and 

derivatives.240 We have also permitted 

index-based ETFs to use non-pro rata 

baskets where the ETF has determined 

to use representative sampling of its 

portfolio to create its basket,241 and for 

temporary periods to replicate changes 

in the ETF’s portfolio holdings as a 

result of the rebalancing of the ETF’s 

securities market index. 

Our recent exemptive orders also have 

permitted ETFs to specifically substitute 

cash for some or all of the securities in 

the ETF’s basket in certain limited 

circumstances, including where the 

basket includes securities that are not 

eligible for trading due to local trading 

restrictions or are not available in 

sufficient quantity for purchases of 

creation units.242 In addition, while 

most existing ETFs typically engage in 

creation and redemption transactions on 

an in-kind basis, we have permitted 

ETFs to use an all-cash basket.243 Due 

to the limited transferability of certain 

financial instruments, some ETFs 

operate on a cash-only basis under their 

exemptive orders.244

The requirement that baskets 

correspond pro rata to the ETF’s 

portfolio holdings, and the increasingly 

limited exceptions to the pro rata 

requirement, were designed to address 

the risk that an authorized participant 

could take advantage of its relationship 

with the ETF and pressure the ETF to 

construct a basket to be used only for 

that authorized participant and that 

favors the authorized participant to the 

detriment of the ETF’s shareholders. For 

example, because ETFs rely on 

authorized participants to maintain the 

secondary market by promoting an 

effective arbitrage mechanism, an 

authorized participant holding less 

liquid or less desirable securities 

potentially could pressure an ETF into 

accepting those securities in its basket 

in exchange for liquid ETF shares (i.e., 

dumping). An authorized participant 

also could pressure the ETF into 

including in its basket certain desirable 

securities in exchange for ETF shares 

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245See supra footnote 22 and accompanying text. 

246See Schwab ETP Comment Letter, supra 

footnote 115, at n.10 (‘‘[W]e looked at the daily 

National Securities Clearing Corporation Portfolio 

Composition Files for three Fixed-Income ETFs that 

each seek to track the Barclays U.S. Aggregate Bond 

Index. The first ETF is subject to the pro rata 

requirement and on the August 7, 2015 trade date 

that ETF included 1,486 securities in its creation 

basket. The second and third ETFs are not subject 

to the pro rata requirement. In striking contrast, on 

the same trade date these two ETFs included only 

64 and 56 securities in their creation baskets, 

respectively.’’). 

247As discussed above, many ETFs, including 

fixed-income ETFs, are permitted under their 

exemptive orders to satisfy redemptions entirely in 

cash where the ETF holds thinly traded securities, 

among other circumstances. See, e.g., Pacific 

Investment Management Company LLC et al., 

Investment Company Act Release Nos. 28723 (May 

11, 2009) [74 FR 22772 (May 14, 2009)] (notice) and 

28752 (June 1, 2009) (order) and related application. 

248 In-kind redemptions allow ETFs to avoid 

taxable events that arise when selling securities for 

cash within the ETF. 

249See infra footnote 438 and accompanying 

paragraph; see also infra footnote 444 and 

accompanying text. 

250See proposed rule 6c–11(c)(3). We note that 

ETFs already may have policies and procedures 

governing the construction of baskets in order to 

comply with the representations and conditions of 

their exemptive orders. These policies and 

procedures, however, would not have been subject 

to the requirements we are proposing for custom 

basket policies and procedures, which we discuss 

below. 

251See supra footnote 38 for a discussion of 

sampling. 

252See proposed rule 6c–11(a) (defining ‘‘custom 

baskets’’ to include baskets that are composed of a 

non-representative selection of the ETF’s portfolio 

holdings). 

253A basket that is a pro rata representation of 

the ETF’s portfolio holdings, except for minor 

deviations when it is not operationally feasible to 

include a particular instrument within the basket, 

generally would not be considered a ‘‘custom 

basket.’’ 

254See proposed rule 6c–11(a) (defining ‘‘custom 

baskets’’ to include different baskets used in 

transactions on the same business day). 

picking). In either case, the ETF’s other 

investors would be disadvantaged and 

would be left holding shares of an ETF 

with a less liquid or less desirable 

portfolio of securities. These abuses also 

could occur when a liquidity provider 

or other market participant engages in 

primary market transactions with the 

ETF by using an authorized participant 

as an agent.245

Based on our experience with ETFs, 

however, we recognize that there are 

many circumstances, in addition to the 

specific circumstances enumerated in 

our orders, where allowing baskets to 

differ from a pro rata representation or 

allowing the use of different baskets for 

different authorized participants could 

benefit the ETF and its shareholders. 

For instance, ETFs without basket 

flexibility typically are required to 

include a greater number of individual 

securities within their baskets when 

transacting in kind, making it more 

difficult and costly for authorized 

participants and other market 

participants to assemble or liquidate 

baskets.246 This could result in wider 

bid-ask spreads and potentially less 

efficient arbitrage. In such 

circumstances, these ETFs may be at a 

competitive disadvantage to ETFs with 

greater basket flexibility. As a result, 

these differing conditions and 

requirements for basket composition in 

our exemptive orders may have created 

a disadvantage for newer ETFs that are 

subject to our more recent, stringent 

restrictions on baskets. 

Moreover, we believe that certain 

exceptions to a pro rata basket 

requirement may help ETFs operate 

more efficiently. For example, a lack of 

basket flexibility may cause some ETFs, 

particularly fixed-income ETFs, to 

satisfy redemption requests entirely in 

cash in order to avoid losing hard-tofind securities and to preserve the ETF’s 

ability to achieve its investment 

objectives.247 ETFs that meet 

redemptions in cash may be required to 

maintain larger cash positions to meet 

redemption obligations, potentially 

resulting in cash drag on the ETF’s 

performance. The use of cash baskets 

also may be less tax-efficient than using 

in-kind baskets to satisfy redemptions, 

and may result in additional transaction 

costs for the purchase and sale of 

portfolio holdings.248

We believe it is appropriate, therefore, 

to provide additional basket flexibility, 

subject to conditions designed to 

address concerns regarding the potential 

risk of overreaching. Additional basket 

flexibility potentially could benefit ETF 

investors through more efficient 

arbitrage and narrower bid-ask spreads, 

among other benefits.249 Further, we 

believe that permitting the same level of 

basket flexibility for all ETFs relying on 

the rule would give a consistent 

structure to ETFs relying on the rule and 

would remove a barrier to entry for new 

ETFs. 

As proposed, rule 6c–11 would 

require all ETFs relying on the rule to 

adopt and implement written policies 

and procedures that govern the 

construction of baskets and the process 

that will be used for the acceptance of 

baskets.250 These policies and 

procedures would be required to cover 

the methodology that the ETF would 

use to construct baskets. For example, 

the policies and procedures should 

detail the circumstances when the 

basket may omit positions that are not 

operationally feasible to transfer in 

kind. The policies and procedures 

should detail when the ETF would use 

representative sampling of its portfolio 

to create its basket, and how the ETF 

would sample in those 

circumstances.251 The policies and 

procedures also should detail how the 

ETF would replicate changes in the 

ETF’s portfolio holdings as a result of 

the rebalancing or reconstitution of the 

ETF’s securities market index, if 

applicable. 

In addition to requiring that ETFs 

relying on the proposed rule adopt and 

implement policies and procedures 

regarding the composition of baskets, 

the proposed rule defines two particular 

types of baskets as ‘‘custom baskets,’’ 

which are subject to additional 

conditions designed to protect ETF 

investors. First, baskets that are 

composed of a non-representative 

selection of the ETF’s portfolio holdings 

would be defined as custom baskets.252

A non-representative selection of the 

ETF’s portfolio holdings would include, 

but not be limited to, baskets that do not 

reflect: (i) A pro rata representation of 

the ETF’s portfolio holdings; 253 (ii) a 

representative sampling of the ETF’s 

portfolio holdings; or (iii) changes due 

to a rebalancing or reconstitution of the 

ETF’s securities market index, if 

applicable. 

Second, different baskets used in 

transactions on the same business day 

are defined as custom baskets under the 

proposed rule.254 For example, if an 

ETF exchanges a basket with an 

authorized participant that reflects a 

representative sampling of the ETF’s 

portfolio holdings and a different basket 

with either the same or another 

authorized participant that represents a 

different representative sampling, both 

baskets would be custom baskets. 

Similarly, if an ETF substitutes cash in 

lieu of a portion of basket assets for a 

single authorized participant, that 

basket would be a custom basket. 

We believe the use of custom baskets 

presents an increased risk that the ETF 

may be subject to improper pressure by 

an authorized participant to create 

specific baskets that favor that 

authorized participant. For example, 

using a custom basket could give 

authorized participants more 

opportunities for cherry-picking, 

dumping, or other abuses, including the 

potential for manipulative trading in the 

underlying portfolio securities. The 

proposed rule includes heightened 

process requirements for ETFs that use 

custom baskets as a means to protect 

against these risks. We believe that 

requiring an ETF that relies on the 

proposed rule to adopt basket policies 

and procedures that include specified 


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255 In addition, in a highly competitive market, 

such as the market for ETFs, low performance or 

high tracking error would make ETFs undesirable 

for participants in both the primary and secondary 

markets. ETFs that do not guard closely against 

dumping and cherry-picking could have 

diminished performance or higher tracking error 

over time, which would likely cause flows out of 

the fund. 

256Proposed rule 6c–11(c)(3)(i). We also are 

proposing to require ETFs to maintain records 

detailing the composition of each custom basket. 

See infra section II.D. 

257See proposed rule 6c–11(d)(2)(ii). 

258An investment adviser has a fiduciary duty to 

act in the best interests of a fund it advises. See 

section 36(a) under the Act. See also, e.g., Rosenfeld 

v. Black, 445 F.2d 1337 (2d Cir. 1971); Brown v. 

Bullock, 194 F. Supp. 207, 229, 234 (S.D.N.Y.), 

aff’d, 294 F.2d 415 (2d Cir. 1961); In re Provident 

Management Corp., Securities Act Release No. 5155 

(Dec. 1, 1970), at text accompanying n.12; Rule 38a1 Adopting Release, supra footnote 223, at n.68. 

259See Rule 38a–1 Adopting Release, supra 

footnote 223. 

260For example, rule 38a–1 requires a fund’s 

chief compliance officer to provide a written report 

to the ETF’s board of directors, no less frequently 

than annually, that addresses, among other things, 

the operation of the fund’s compliance policies and 

procedures and any material changes made to those 

policies and procedures since the date of the last 

report and any material changes to the policies and 

procedures recommended as a result of the annual 

review of the policies and procedures. See rule 38a– 

1(a)(4)(iii)(A). 

261The 2008 proposal would have defined the 

term ‘‘basket assets’’ as the securities or other assets 

specified each business day in name and number 

by an ETF as the securities or assets in exchange 

for which it will issue or in return for which it will 

redeem ETF shares. See 2008 ETF Proposing 

Release, supra footnote 3. 

262See id., at nn.120–121 (describing the 

circumstances in which an ETF may use cash in 

lieu of certain securities in the basket). 

263See, e.g., ICI 2008 Comment Letter. 

requirements is an appropriately 

tailored means to address concerns that 

authorized participants may overreach. 

Furthermore, we believe that the 

consistent implementation of custom 

basket policies and procedures would 

discipline the basket process and would 

act as a safeguard against potential 

cherry picking or dumping of unwanted 

securities by authorized participants.255

Under the proposed rule, an ETF 

using custom baskets must adopt 

policies and procedures that: (i) Set 

forth detailed parameters for the 

construction and acceptance of custom 

baskets that are in the best interests of 

the ETF and its shareholders, including 

the process for any revisions to, or 

deviation from, those parameters; and 

(ii) specify the titles or roles of the 

employees of the ETF’s investment 

adviser who are required to review each 

custom basket for compliance with 

those parameters (‘‘custom basket 

policies and procedures’’).256 Effective 

custom basket policies and procedures 

should provide specific parameters 

regarding the methodology and process 

that the ETF would use to construct or 

accept each custom basket. An ETF’s 

custom basket policies and procedures 

should describe the ETF’s approach for 

testing compliance with the custom 

basket policies and procedures and 

assessing (including through back 

testing or other periodic reviews) 

whether the parameters continue to 

result in custom baskets that are in the 

best interests of the ETF and its 

shareholders. The custom basket 

policies and procedures should be 

consistently applied and must establish 

a process that the ETF will adhere to if 

it wishes to make any revisions to, or 

deviate from, the parameters. In 

addition, ETFs should consider 

adopting reasonable controls designed 

to prevent inappropriate differential 

treatment among authorized 

participants. 

As part of the custom basket policies 

and procedures, an ETF must specify 

the titles or roles of employees of the 

ETF’s investment adviser who are 

required to review each custom basket 

for compliance with the parameters set 

forth in those policies and procedures. 

An ETF may want to consider whether 

employees outside of portfolio 

management should review the 

components of custom baskets before 

approving a creation or redemption. 

Finally, as discussed in more detail 

below in section II.D, the ETF would be 

required to create a record stating that 

each custom basket complies with the 

ETF’s custom basket policies and 

procedures.257

We believe that the ETF’s investment 

adviser is in the best position to design 

and administer the custom basket 

policies and procedures and to establish 

parameters that are in the best interests 

of the ETF and its shareholders.258 The 

ETF’s adviser (and personnel) would be 

familiar with the ETF’s portfolio 

holdings and would be able to assess 

whether the process and methodology 

used to construct or accept a custom 

basket would be in the best interests of 

the ETF and its shareholders and 

whether a particular custom basket 

complies with the parameters set forth 

in the custom basket policies and 

procedures. We believe that these 

requirements would allow an ETF to 

establish a tailored framework for the 

utilization of custom baskets, while also 

requiring the ETF to put into place 

safeguards against abusive practices 

related to basket composition. Custom 

basket policies and procedures designed 

and utilized in the best interests of an 

ETF and its shareholders may help the 

ETF manage its portfolio more 

efficiently, facilitate the arbitrage 

mechanism for the ETF, provide 

liquidity in markets for the ETF’s shares 

and/or the ETF’s underlying portfolio 

holdings, or provide other benefits to 

the ETF. 

In addition, ETFs currently are 

required by rule 38a–1 under the Act to 

adopt, implement and periodically 

review written policies and procedures 

reasonably designed to prevent 

violations of the federal securities 

laws.259 An ETF’s compliance policies 

and procedures should be appropriately 

tailored to reflect its particular 

compliance risks. An ETF’s basket 

policies and procedures (including its 

custom basket policies and procedures), 

therefore, should be covered by the 

ETF’s compliance program and other 

requirements under rule 38a–1.260 For 

example, an ETF would be required to 

preserve the basket policies and 

procedures pursuant to the 

requirements of rule 38a–1(d)(1). We 

believe that the ETF’s board of directors’ 

oversight of the ETF’s compliance 

policies and procedures, as well as their 

general oversight of the ETF, would 

provide an additional layer of protection 

for an ETF’s use of custom baskets. 

Our 2008 proposal did not expressly 

contemplate that an ETF would be 

permitted to substitute other securities 

in lieu of other basket assets.261 Instead, 

the proposal noted that in some 

circumstances it may not be practicable, 

convenient or operationally possible for 

the ETF to operate on an in-kind basis, 

and indicated that a fund could 

substitute cash for some or all of the 

securities in the basket.262 Commenters 

on this aspect of the 2008 proposal 

agreed with the definition of basket and 

did not recommend any 

modifications.263

Under proposed rule 6c–11, however, 

an ETF would be permitted to construct 

baskets using cash, securities, or other 

positions, provided that the ETF has 

satisfied the appropriate policies and 

procedures requirement (i.e., the 

standard requirement or the heightened 

requirement for custom baskets). As 

noted above, the use of in-kind baskets 

can result in several advantages to an 

ETF and its investors, including tax 

efficiencies and transaction cost savings. 

We believe that this approach would 

provide ETFs with flexibility to cover 

operational circumstances that make the 

inclusion of certain portfolio securities 

and other positions in a basket 

operationally difficult (or impossible), 

while also facilitating portfolio 

management changes in a cost- and taxefficient manner. We believe that an 

ETF’s policies and procedures should 

include details regarding the 


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264See proposed rule 6c–11(d)(2)(ii). 

265See proposed rule 6c–11(c)(1)(i)(B) and (C). 

Under proposed rule 6c–11(a), the ‘‘cash balancing 

amount’’ would be defined as an amount of cash to 

account for any differences between the value of a 

basket and the NAV of a creation unit. Our ETF 

exemptive orders have recognized a cash balancing 

amount to reconcile any difference between the 

asset value of a creation unit and the value of the 

ETF’s basket. 

266See proposed rule 6c–11(c)(1)(i)(B). 

267See id. 

circumstances in which cash, securities, 

or other positions would be substituted. 

We seek comment on this aspect of 

the proposed rule. 

• Is our proposed definition of 

‘‘baskets’’ appropriate? Should the term 

exclude investments that are not 

securities or assets? Should the term 

exclude instruments that cannot be 

transferred in kind? 

• Is our proposed requirement that all 

ETFs adopt written policies and 

procedures governing basket 

construction appropriate? Are there 

alternatives we should consider? For 

example, should we require only ETFs 

that use custom baskets to adopt 

policies and procedures? Or, instead of 

requiring ETFs to adopt policies and 

procedures governing basket 

construction generally and custom 

basket policies and procedures, should 

we adopt a single requirement that all 

ETFs adopt policies and procedures 

governing the construction of baskets? If 

so, what parameters should be placed 

on those policies and procedures? What 

parameters, if any, should we place on 

board oversight of the policies and 

procedures governing the construction 

of baskets? 

• Instead of permitting basket 

flexibility as proposed, should we 

require baskets to reflect a pro rata 

representation of the ETF’s portfolio 

holdings? Should we enumerate specific 

exemptions to the pro rata 

representation requirement? If so, what 

should those exemptions include? For 

example, should we include an 

exemption for an authorized participant 

prohibited from transacting in a certain 

basket security? Should we require 

baskets to be representative of the ETF’s 

portfolio holdings according to some 

other criteria? 

• Should we allow ETFs to utilize 

baskets that deviate from a pro rata 

representation of the ETF’s portfolio 

holdings, but require ETFs to utilize the 

same basket for all transactions on a 

particular business day? If so, why? 

• Do the proposed basket conditions 

appropriately address concerns of 

overreaching by authorized participants 

or other market participants, including 

those that are first- or second-tier 

affiliates identified in the rule? Should 

the proposed rule include any other 

conditions to minimize the potential 

risks of overreaching or other conflicts 

of interest by such affiliates? For 

example, should we limit the ability of 

an ETF to utilize a custom basket when 

an authorized participant or other 

market participant is an affiliate covered 

by the proposed exemption from section 

17(a)? 

• Is our proposed definition of 

‘‘custom basket’’ appropriate? 

Alternatively, should the term 

encompass any basket that deviates 

from a pro rata representation of the 

identities and quantities of the portfolio 

holdings held by the ETF? Should we 

provide additional guidance regarding 

instances where the basket is composed 

of a non-representative selection of the 

ETF’s portfolio? Should we include 

examples in the definition of ‘‘custom 

baskets’’? 

• Are there any reasons to prohibit an 

ETF from using a custom basket? If so, 

what are they? 

• Should we provide additional 

guidance or include additional 

requirements in the rule regarding the 

elements of effective custom basket 

policies and procedures? For example, 

should custom basket policies and 

procedures set forth the minimum 

number of positions that would be 

included in a custom basket? Should the 

custom basket policies and procedures 

set forth parameters regarding the effect 

of the custom basket on the value of the 

ETF’s portfolio holdings, its tracking 

error (if applicable), and the portfolio’s 

risks? Should these policies and 

procedures set forth the circumstances 

under which the ETF would substitute 

cash in lieu of portfolio holdings after 

considering the effect cash would have 

on performance, trading costs, and if 

accepting cash would have tax 

consequences? Should they set forth the 

parameters in which the ETF will accept 

odd-lot securities in a custom basket? 

Are there any other considerations that 

should be included? Alternatively, 

should we eliminate any or all of the 

considerations discussed above? 

• Should we require an ETF to adopt 

policies and procedures that set forth 

detailed parameters for the construction 

or acceptance of custom baskets that are 

in the best interests of the ETF and its 

shareholders as proposed? Should we 

require the policies and procedures to 

include a process for any revisions to or 

deviation from the parameters as 

proposed? Are there other parameters 

we should consider? Should we require 

the custom basket policies and 

procedures to list the titles or roles of 

the employees who review each custom 

basket for compliance with the 

parameters as proposed? Should we 

provide guidance regarding how this 

review should be done in cases where 

the ETF is sub-advised? Should we 

require that this review be done only by 

employees outside of portfolio 

management? If so, which employees 

and why? 

• As proposed, rule 6c–11 would 

require an ETF to create a record stating 

that each custom basket complies with 

the ETF’s custom basket policies and 

procedures.264 Should we establish any 

other recordkeeping requirements 

relating to basket flexibility? 

• Should the proposed rule require 

the ETF’s investment adviser to review 

the basket policies and procedures 

(including the custom basket policies 

and procedures) on an annual basis or 

with such frequency as the ETF’s 

adviser deems reasonable and 

appropriate? Should the proposed rule 

include board reporting requirements? 

For example, should the proposed rule 

require the adviser to deliver an annual 

report to the ETF’s board regarding the 

implementation of the basket policies 

and procedures? 

b. Posting of a Published Basket 

We also are proposing to require an 

ETF to post on its website information 

regarding a published basket at the 

beginning of each business day, as well 

as the estimated cash balancing amount 

if any.265 We believe this disclosure 

would contribute to the efficiency of the 

arbitrage mechanism by providing 

authorized participants and other 

market participants with timely 

information regarding the contents of a 

basket that the ETF will accept for 

creations and redemptions each 

business day. This, in turn, would allow 

market participants to value the 

contents of the basket on an intraday 

basis to determine whether arbitrage 

opportunities exist. This information 

also permits market makers to compare 

the ETF’s portfolio holdings with the 

basket. 

In particular, we are proposing to 

require that an ETF publish on its 

website one basket that it would 

exchange for orders to purchase or 

redeem creation units to be priced based 

on the ETF’s next calculation of NAV 

per share each business day.266 This 

‘‘published’’ basket must be disclosed 

before the opening of trading of the 

ETF’s shares and before the ETF begins 

accepting orders for the purchase or 

redemption of creation units to be 

priced based on the ETF’s next 

calculation of NAV.267 This requirement 

is designed to mitigate possible 

inefficiencies in the arbitrage 


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268As proposed, an ETF relying on the rule also 

would be required to disclose its portfolio holdings 

that will form the basis of the next calculation of 

NAV per share in this manner. See proposed rule 

6c–11(c)(1)(i)(A). 

269Our proposal does not prevent an ETF from 

changing the assets in a published basket to 

respond to market conditions after the basket is 

published. 

270See 2008 ETF Proposing Release, supra 

footnote 3, at n.27 and accompanying text. Many 

exemptive orders also require ETFs to make basket 

information available on a daily basis. See, e.g., Salt 

Financial, LLC, et al., Investment Company Act 

Release Nos. 32974 (Jan. 23, 2018) [83 FR 4097 (Jan. 

29, 2018)] (notice) and 33007 (Feb. 21, 2018) (order) 

(‘‘Salt Financial’’). 

271See, e.g., NYSE Arca 2008 Comment Letter. 

272We request comment regarding additional 

proposed website disclosures at infra section II.C.6. 

273See, e.g., Reporting Modernization Adopting 

Release, supra footnote 147. 

274Proposed rule 6c–11(c)(1). 

275See supra sections II.C.4 and II.C.5. 

mechanism that could result from 

delaying the publication of an ETF’s 

basket.268

Under this requirement, an ETF 

would publish a basket that it would 

accept if presented by any authorized 

participant in exchange for creation 

units (or present to an authorized 

participant redeeming creation units).269

Accordingly, an ETF that planned to use 

only custom baskets on a particular 

business day (e.g., a basket reflecting a 

non-representative selection of the 

ETF’s portfolio holdings), would be 

required to post a custom basket as its 

‘‘published’’ basket. 

Because an ETF would be required to 

post only one published basket to 

comply with this condition, there may 

be occasions where an ETF would not 

post the contents of every custom 

basket. We considered proposing that 

ETFs be required to publish, after the 

close of trading on each business day, 

information regarding every basket used 

by the ETF to serve as an additional 

check against overreaching by 

authorized participants. However, we 

preliminarily believe that this 

requirement is an unnecessary 

additional burden, resulting in 

compliance and other operational costs 

for ETFs to review the information 

before it is posted. Instead, as discussed 

below in section II.D, we are proposing 

to require ETFs to maintain records 

detailing the composition of baskets, 

which would allow our staff to review 

an ETF’s baskets as part of an 

examination. 

The 2008 proposed rule did not 

require ETFs to disclose their baskets. 

We did note in that proposal, however, 

that basket disclosure was a widely 

adopted industry practice and 

facilitated effective arbitrage activity.270

On this issue, commenters on the 2008 

proposal stated that it was not necessary 

for the Commission to require ETFs to 

disclose their baskets because that 

information was available in the 

portfolio composition files provided 

each business day by ETFs to the 

National Securities Clearing Corporation 

(‘‘NSCC’’).271 While this still may be 

true, the composition of an ETF’s basket 

for a given day may be important 

information to not only authorized 

participants and large institutional 

investors (who, as NSCC members, have 

access to the daily portfolio composition 

files), but to other market participants as 

well. For example, the information 

allows investors to compare the ETF’s 

baskets for a given day with its portfolio 

holdings, assists market participants 

who are building their intraday hedge 

(we understand that some market 

participants primarily look to the 

baskets rather than the whole portfolio), 

and is important for purposes of 

estimating any cash balancing amounts 

as it allows market participants to 

compare the basket to the whole 

portfolio. We also believe that this 

proposed basket disclosure requirement 

is sufficiently narrow to not impose a 

significant burden on ETFs because it 

requires only one basket-related 

disclosure each trading day, at the 

beginning of the day. 

We request comment on this proposed 

requirement.272

• Are we correct that disclosure of an 

ETF’s basket facilitates the arbitrage 

mechanism? Is an ETF’s basket 

composition useful information to ETF 

investors in the secondary market? 

• Should we require the posting of a 

basket as proposed? Should we provide 

additional guidance regarding what 

types of basket would constitute a 

published basket? 

• Would the disclosure of one basket 

at the beginning of each business day 

provide enough information to all 

market participants about an ETF’s 

basket composition, particularly for 

ETFs using custom baskets? Should we 

instead require ETFs to disclose each 

basket used on a given business day 

after the close of trading on the ETF’s 

website? Would these approaches cause 

competitive concerns or cause 

significant operational challenges? What 

costs and benefits would be associated 

with a requirement to publish all 

baskets used each business day? Would 

such an approach allow better policing 

of potential overreaching by authorized 

participants? 

• If an ETF is no longer willing to 

accept the basket posted on its website 

on a particular business day because of 

market events, should the rule require 

the ETF to post a replacement basket on 

the website that the ETF would accept? 

• Our proposal is designed to strike a 

balance between process and oversight 

requirements (i.e., policies and 

procedures governing basket 

construction) and disclosure 

requirements. Do commenters agree 

with this approach? Would additional 

basket transparency lessen the need for 

policies and procedures relating to 

basket composition? Is there a more 

appropriate balance between the two 

types of requirements that we should 

consider? 

• Is our proposed definition of ‘‘cash 

balancing amount’’ appropriate? 

• Should we require the disclosure of 

baskets on an ETF’s website as 

proposed? Alternatively, should we 

allow ETFs to comply with the basket 

transparency condition by sending the 

portfolio composition file to a central 

clearing facility in accordance with 

current practices? What would be the 

costs or operational burdens of each 

approach? Would the website disclosure 

of this information benefit any market 

participants (including retail investors) 

that may not have access to the portfolio 

composition file? If so, how would 

market participants use this 

information? 

6. Website Disclosure 

There has been a significant increase 

in the use of the internet as a tool for 

disseminating information,273 and we 

believe that many investors obtain 

information regarding ETFs on the 

ETFs’ websites. Proposed rule 6c–11 

therefore would require ETFs to disclose 

certain information on their websites as 

a condition to the rule.274 As noted 

above, we believe that the arbitrage 

mechanism works more efficiently 

when certain data is publicly available 

to investors each trading day, and are 

therefore proposing ETF website 

disclosures in order to provide 

transparency of portfolio holdings and 

baskets.275 In addition, we are 

proposing several website disclosure 

requirements that are designed to 

provide investors with key metrics to 

evaluate their investment and trading 

decisions in a format that is easily 

accessible and frequently updated. 

Specifically, the proposed rule would 

require disclosure regarding: (i) The 

ETF’s NAV per share, market price, and 

premium or discount, each as of the end 

of the prior business day; (ii) bid-ask 

spreads; and (iii) historical information 

regarding premiums and discounts. 

Some of these conditions are based on 

our exemptive relief, which has 

required ETFs to disclose on their 


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276See, e.g., Barclays Global 2008, supra footnote 

58. 

277See supra footnote 134 and accompanying 

text. 

278See infra section II.H. 

279See 2008 ETF Proposing Release, supra 

footnote 3. 

280See proposed rule 6c–11(a). 

281See, e.g. Self-Regulatory Organizations; New 

York Stock Exchange LLC; NYSE MKT LLC; Notice 

of Filings of Amendment No. 1, and Order Granting 

Accelerated Approval of Proposed Rule Changes, as 

Modified by Amendment No. 1, to Provide for How 

the Exchanges Would Determine an Official Closing 

Price if the Exchanges are Unable to Conduct a 

Closing Transaction, Exchange Act Release No. 

78015 (June 8, 2016) [81 FR 38747 (June 14, 2016)] 

(NYSE backup procedures). 

282See, e.g., Chapman 2008 Comment Letter 

(noting that shares of some smaller ETFs may not 

trade often or at all on a particular day); ICI 2008 

Comment Letter (noting that closing price may be 

less accurate because the last trade occurred at a 

much earlier time than the time as of which NAV 

is calculated). 

283See, e.g., Chapman 2008 Comment Letter. 

284See proposed rule 6c–11(a) (defining ‘‘market 

price’’); see also rule 600(b)(42) of Regulation NMS 

(defining NBBO). [17 CFR 242.600]. The NBBO 

represents the highest bid and lowest offer for an 

ETF share consolidated across all exchanges. 

285See infra section II.H.1. 

286See General Instruction A to Form N–1A. 

287An ETF would use the market price of an ETF 

share in calculating premiums and discounts. See 

proposed rule 6c–11(a) (defining ‘‘premium or 

discount’’ to mean the positive or negative 

difference between the market price of an ETF share 

and the ETF’s current NAV per share, expressed as 

a percentage of the ETF’s current NAV per share). 

websites certain information regarding 

their investments and operations, 

including quantitative information 

regarding discounts or premiums at 

which the ETF’s shares trade on the 

secondary market.276 Our orders have 

required ETFs to publicly disclose on 

their websites: (i) The prior business 

day’s NAV per share; (ii) the market 

closing price or the midpoint of the bidask spread at the time of the calculation 

of NAV; and (iii) a calculation of the 

premium or discount of the market 

closing price or midpoint of the bid-ask 

spread against NAV per share.277

Similarly, Form N–1A currently 

provides an ETF with the option to omit 

certain historical information regarding 

premiums and discounts from its 

prospectus and annual report if the 

disclosure is provided on its website.278

Based on our experience overseeing 

ETFs, we are proposing additional 

website disclosure requirements that 

have not been part of our exemptive 

relief or Form N–1A requirements. We 

also are requesting comment regarding 

ways to better inform investors about 

intraday deviations between an ETF’s 

market price and: (i) NAV per share; (ii) 

the contemporaneous value of its 

portfolio; or (iii) both. Each of the 

proposed website disclosures is 

discussed below. 

a. Daily NAV, Market Price, and 

Premiums and Discounts 

Proposed rule 6c–11(c)(1)(ii) would 

require ETFs to post on their websites, 

on each business day, the ETF’s current 

NAV per share, market price, and 

premium or discount, each as of the end 

of the prior business day. This 

disclosure provides investors with a 

‘‘snapshot’’ view of the difference 

between an ETF’s NAV per share and 

market price on a daily basis. It is 

designed to alert investors to the 

relationship between NAV per share 

and the market price of the ETF’s shares 

and that they may sell or purchase ETF 

shares at prices that do not correspond 

to NAV of the ETF. It also is designed 

to allow investors to compare this 

information across ETFs. For example, 

an investor using this information likely 

would notice that ETFs tracking 

emerging markets tend to have greater 

premiums or discounts than ETFs 

tracking broad-based domestic indexes. 

We believe that daily website disclosure 

of this information would promote 

transparency and help investors better 

understand the risk that an ETF’s 

market price may be higher or lower 

than the ETF’s NAV per share. We 

further believe that ETF investors use 

this information today, as ETFs 

currently provide this website 

disclosure pursuant to the terms of their 

exemptive orders. 

This proposed requirement is 

consistent with our exemptive orders 

and generally consistent with our 2008 

proposal, except we have changed the 

definition of ‘‘market price’’.279

Proposed rule 6c–11 would define the 

term ‘‘market price’’ to mean: (i) The 

official closing price of an ETF share; or 

(ii) if it more accurately reflects the 

market value of an ETF share at the time 

as of which the ETF calculates current 

NAV per share, the price that is the 

midpoint of the national best bid and 

national best offer (‘‘NBBO’’), calculated 

as of the time NAV per share is 

calculated.280

The 2008 proposed rule would have 

defined ‘‘market price’’ only as the last 

price at which ETF shares trade on their 

principal U.S. trading market during a 

regular trading session. However, we 

believe that using the ‘‘official closing 

price,’’ as opposed to the ‘‘closing 

market price,’’ is a better measure of an 

ETF’s market price, particularly in 

situations where the last trade of the day 

was not reflective of the actual market 

price (e.g., due to an erroneous order). 

Exchanges have detailed rules regarding 

the determination of the official closing 

price of a security.281 For example, if a 

listing exchange experiences a systems 

disruption and cannot conduct closing 

auctions, exchanges use their back-up 

procedures to determine the ‘‘official 

closing price’’ for the affected securities 

(such as relying on a backup exchange’s 

closing auction). As a result, we 

preliminarily believe that using the 

‘‘official closing price’’ provides a more 

precise measurement of an ETF’s market 

price, including during disruptive 

market events. 

Commenters on the 2008 ETF 

Proposing Release who addressed this 

aspect of the proposal opposed the 

proposed definition of market price 

because of concerns that the last price 

at which an ETF trades could be stale 

at the time as of which NAV per share 

is calculated.282 These commenters 

suggested that ETFs instead be 

permitted to use the midpoint between 

the highest bid and the lowest offer at 

the time as of which the ETF’s NAV is 

calculated.283 We generally agree and, 

as a result, we are proposing to permit 

ETFs to use a price that is the midpoint 

of the NBBO as of that time, if it is more 

accurate.284 Because security 

information processors calculate NBBO 

continuously during the trading day, 

NBBO has the benefit of being a 

verifiable third-party quote. We believe 

that this approach provides an 

appropriate degree of flexibility to an 

ETF when its last reported sales price 

may be stale, while at the same time 

providing a consistent and verifiable 

methodology for how ETFs determine 

market price. 

As discussed in more detail below, 

the proposed definition of market price 

also differs from the definition currently 

used in Form N–1A.285 Form N–1A 

defines ‘‘market price’’ as the last 

reported sale price or, if it more 

accurately reflects the current market 

value of the ETF’s shares, ‘‘a price 

within the range of the highest bid and 

lowest offer.’’ 286 We believe specifying 

that an ETF must use the midpoint of 

the NBBO, rather than ‘‘a price within 

the range of the highest bid and lowest 

offer’’ still provides the ETF with 

flexibility in determining a market price 

for its shares that accurately reflects the 

shares’ market value. At the same time, 

requiring ETFs to use the midpoint in 

these circumstances would mitigate the 

potential for gaming practices that could 

inaccurately minimize a deviation 

between market price and NAV per 

share when showing premiums and 

discounts.287 We are proposing to 

amend Form N–1A to remove the 

definition of market price in that form 


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288See infra section II.H.1. 

289See LRM Adopting Release, supra footnote 

101, at n.33 and accompanying text. 

290See id at text following n.524 (‘‘[S]hares of an 

ETF whose underlying securities are relatively less 

liquid may not be able to be counted on to provide 

liquidity to a fund investing in these shares during 

times of stress. In the case of a significant decline 

in market liquidity, if authorized participants were 

unwilling or unable to trade ETF shares in the 

primary market, and the majority of trading took 

place among investors in the secondary market, the 

ETF’s shares could trade continuously at a premium 

or a discount to the value of the ETF’s underlying 

portfolio securities.’’). 

291See, e.g., Henry T.C. Hu and John D. Morley, 

A Regulatory Framework for Exchange-Traded 

Funds, 91 S. Cal. Law Review (forthcoming 2018) 

(‘‘Hu and Morley’’) at 53 (‘‘While simplicity and 

other reasons help explain the SEC’s decision to 

look only at the close and not intra-day 

performance, the result was an emphatically 

reassuring picture being presented to investors. As 

a result, an investor may have a misleading sense 

as to the true risks and returns of the ETF.’’). 

292See supra footnote 128 and accompanying 

text. 

293See supra section II.C.3. 

294Many ETFs provide qualitative disclosures in 

their prospectuses regarding the potential for 

periods of market volatility that could lead to 

deviations from NAV per share. See, e.g., supra 

footnote 126. 

295See proposed amendment to Item 3 of Form 

N–1A. See also infra section II.H.2. for a discussion 

of the bid-ask spread disclosure requirements. We 

are also proposing to require ETFs to provide an 

interactive calculator that would provide investors 

with the ability to customize the hypothetical bidask spread disclosures in Item 3 of Form N–1A to 

the investor’s specific investing situation. See id. 

296See proposed amendment to Item 3 of Form 

N–1A. 

297See, e.g., Simon Constable, How to Measure 

ETF Spreads, The Wall Street Journal (Nov. 5, 

2017), available at https://www.wsj.com/articles/ 

how-to-measure-etf-spreads-1509937200. 

298As discussed in more detail below, mutual 

fund investors typically do not incur bid-ask spread 

costs in connection with their investment in a 

mutual fund. See infra section II.H.2. 

as it would no longer be used in the 

same manner.288

We believe that the daily premium/ 

discount disclosures (and calculation 

methodology) we are proposing would 

provide investors with useful 

information regarding ETFs that 

frequently trade at a premium or 

discount to NAV per share. For 

example, some ETFs have frequent 

deviations between closing market price 

and NAV per share. These ETFs 

typically hold non-U.S. securities and 

trade during hours when the markets for 

their non-U.S. holdings are closed, 

allowing the trading price of ETF shares 

to reflect expected changes in the next 

opening price of the non-U.S. holdings 

(i.e., to help ‘‘discover’’ the price of the 

holdings). ETFs also may have greater 

premiums and discounts to the extent 

that there are greater transaction costs 

associated with assembling baskets. In 

addition, an ETF with less liquid 

portfolio holdings also may show a 

deviation between closing market price 

and NAV per share,289 and an ETF with 

a less efficient arbitrage mechanism may 

frequently show this type of end of day 

deviation.290

We understand, however, that 

proposed premium/discount disclosure 

would not provide investors with 

information regarding intraday 

deviations between market prices and 

the next-calculated NAV or the 

contemporaneous value of the ETF’s 

underlying securities, even if the 

deviation is significant. Some 

commentators have stated that the lack 

of disclosure regarding intraday 

deviations could, in some 

circumstances, be misleading.291 For 

example, some ETFs had relatively large 

intraday deviations between market 

price and intraday indicative values on 

August 24, 2015 that were not reflected 

as a ‘‘premium’’ or ‘‘discount’’ because 

market price and NAV per share were 

tightly correlated by the end of the 

day.292

While we believe that additional 

information regarding intraday 

deviations could help ETF investors 

understand both the potential for 

intraday deviations and the 

circumstances under which deviations 

have occurred in the past, developing an 

accurate and cost-effective methodology 

to calculate intraday deviations for all 

types of ETFs is challenging. For 

example, there are many ways to 

calculate a market price metric, such as 

the average of execution prices on a 

business day or the midpoint of the 

NBBO measured at specific intervals 

during the course of the trading day. 

These measures, however, often do not 

provide a meaningful picture of intraday 

deviations because they can give 

outliers either outsized importance (in 

the case of averages), particularly for 

ETFs with low trading volume, or 

insufficient importance (in the case of 

medians). In addition, the systems 

necessary to calculate and track these 

measures can be complex and costly. 

Similarly, developing an accurate 

measure of the contemporaneous value 

of the ETF’s portfolio is complex. As we 

noted in our discussion of the IIV,293

calculations of contemporaneous value 

can be stale or inaccurate for ETFs with 

foreign securities or less liquid debt 

instruments for which market 

quotations are not readily available. For 

such an ETF, a contemporaneous value 

calculated using last available market 

quotations or stale prices may show a 

premium/discount to any ETF share 

price that factors in fair valuations of 

the ETF’s portfolio holdings. Moreover, 

without prescribed uniform 

methodology requirements, 

contemporaneous values can be 

calculated in different, and potentially 

inconsistent, ways and lead to noncomparable premium/discount 

disclosure. We request comment below 

on potential alternative calculations and 

disclosure requirements that could 

inform investors about intraday 

deviations.294

b. Bid-Ask Spread Disclosure 

As discussed in more detail below, 

our proposed amendments to Form N– 

1A would include new requirements for 

an ETF to disclose information 

regarding bid-ask spreads on its website 

and in its prospectus.295 Specifically, an 

ETF would be required to disclose the 

median bid-ask spread for the ETF’s 

most recent fiscal year. A bid-ask spread 

is the difference between the highest 

price a buyer is willing to pay to 

purchase shares of the ETF (bid) and the 

lowest price a seller is willing to accept 

for share of the ETF (ask).296 The 

proposed website disclosures are 

designed to inform investors that they 

may bear bid-ask spread costs when 

trading ETFs on the secondary market, 

which ultimately could impact the 

overall cost of the investment. We are 

concerned that investors may not be 

aware of the impact trading costs may 

have on their investments in ETFs,297

and therefore, propose to require ETFs 

to disclose median bid-ask spread 

information pursuant to a prescribed 

methodology that would be set forth in 

Form N–1A. We believe that this 

information would provide ETF 

investors with greater understanding of 

these costs and would allow investors to 

compare this information across ETFs. 

Spread costs for ETFs can vary 

significantly, and disclosure regarding 

these costs could aid comparisons of 

ETFs pursuing similar investment 

strategies. We believe this information 

also would allow investors to better 

understand the costs of investing in an 

ETF.298

We are proposing to require the 

disclosure of the bid-ask spread 

information on an ETF’s website to 

provide trading information that can 

help investors make better informed 

investment decisions in a format that is 

easily accessible and relied upon by a 

growing segment of investors. Given the 

importance of this information to 

understanding the total expenses an 

investor may bear when investing in an 

ETF, we preliminarily believe that bidask spread information also should be 

included in an ETF’s prospectus. 

Without this bid-ask spread 

information, we preliminarily believe 


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299Required prospectus disclosures for open-end 

funds currently include shareholder fees such as 

sales charges and redemption fees, as well as 

annual fund operating expenses. See Item 3 of Form 

N–1A. 

300 Instruction 2 to Item 11(g)(2) of Form N–1A. 

ETFs are also required to include a table with 

premium/discount information in their annual 

reports for the five most-recently completed fiscal 

years. Item 27(b)(7)(iv) of Form N–1A. 

301 Item 11(g)(2) of Form N–1A; Item 27(b)(7)(iv) 

of Form N–1A. Although the time period required 

in the disclosure is different in the prospectus and 

annual report, ETFs are permitted to omit both 

disclosures by providing on their websites only the 

premium/discount information required by Item 

11(g)(2) (the most recently completed fiscal year 

and quarters since that year). 

302See proposed rule 6c–11(c)(1)(iii). 

303See Hu and Morley, supra footnote 291, at 12 

(noting that certain kinds of ETFs have much higher 

95% confidence intervals of almost 600 basis 

points) (internal citations omitted). 

304See, e.g., Crystal Kim, This Levered Gold 

Mining ETF Looks Super Scary, Barrons (Apr. 20, 

2017), available at https://www.barrons.com/ 

articles/this-levered-gold-mining-etf-looks-superscary-1492700892 (linking an ETF trading at a 

significant premium to NAV to the ETF’s 

suspension of creation units, and in turn, linking 

the suspension to the limited availability of certain 

investments the ETF needed to make in order to 

seek its investment objective). 

305Under the proposal, the historical premium/ 

discount information would be required for the 

most recently completed calendar year and the most 

recently completed calendar quarters of the current 

year. This period was chosen as it was consistent 

with existing requirements in Item 11(g)(2) of Form 

N–1A. We believe the time period would allow 

investors to readily observe the extent and 

frequency of deviations from NAV per share in a 

graphic format. 

306See infra section II.H.4. 

the fee and expense information 

provided in a prospectus may not 

always provide a complete picture of an 

investment’s true costs and/or allow 

investors to easily compare prospectus 

disclosures across certain investment 

options.299

c. Historical Information Regarding 

Premiums and Discounts 

We also are proposing to require that 

ETFs disclose on their websites 

historical information about the extent 

and frequency of an ETF’s premiums 

and discounts. In particular, proposed 

rule 6c–11(c)(1)(iii) and (iv) would 

require an ETF to post on its website 

both a table and line graph showing the 

ETF’s premiums and discounts for the 

most recently completed calendar year 

and the most recently completed 

calendar quarters of the current year. 

Alternatively, for new ETFs that do not 

yet have this information, the proposed 

rule would require the ETF to post this 

information for the life of the fund. 

Currently, an ETF is required to 

disclose historical premium/discount 

information in its prospectus by 

providing tabular disclosure of the 

number of trading days during the most 

recently completed calendar year and 

quarters since that year ended on which 

the market price of the ETF shares was 

greater than the ETF’s NAV per share 

and the number of days it was less than 

the ETF’s NAV per share.300 An ETF 

currently may omit the disclosure of 

specific premium/discount information 

in its prospectus or annual report if the 

ETF provides the information on its 

website and discloses in the prospectus 

or annual report a website address 

where investors can locate the 

information.301 We believe that 

investors may find this tabular 

information helpful in understanding 

how often an ETF trades at a premium 

or discount and the size of such 

premiums and discounts and are 

proposing to require publication of a 

table on the ETF’s website as part of 

proposed rule 6c–11.302

We additionally believe that graphic 

disclosure could assist some investors 

with understanding how the arbitrage 

mechanism performs for an ETF under 

various market conditions. Depending 

on a variety of factors, an ETF could 

have persistent premiums or discounts 

(or both) from the ETF’s NAV. For 

example, certain classes of ETFs, such 

as those that invest in less liquid 

securities, like high-yield bonds, and 

securities that trade on international 

markets, have more persistent 

deviations in ETF share prices from the 

ETF’s NAV.303 Additionally, for certain 

types of ETFs, the disclosure may 

inform investors about the pricing of the 

ETF’s portfolio holdings. ETFs holding 

foreign securities that are traded on 

markets that are closed during U.S. 

trading hours, for example, may have 

persistent premiums or discounts 

resulting from this timing differential. In 

other cases, a persistent deviation 

between market price and NAV per 

share could demonstrate inefficiencies 

in an ETF’s arbitrage mechanism.304

While past performance cannot 

predict how an ETF will trade in the 

future, we believe that it is important 

that investors, and particularly retail 

investors, understand that certain 

classes of ETFs could have a larger and 

more persistent deviation from NAV, 

which could result in a higher cost to 

investors and a potential drag on 

returns. In addition to alerting 

secondary market investors that an 

ETF’s NAV per share and market price 

may differ, these disclosures would 

provide information regarding the 

frequency and extent of these 

deviations. These disclosures thus 

would help investors understand the 

value of their investment and could 

help shape whether they want to invest 

in a particular ETF. 

We believe that presenting the data as 

both a table and a line graph would 

provide investors with useful 

information in a variety of formats that 

are easy to view and understand, 

depending on the investor’s preference. 

For example, investors may find the 

proposed tabular disclosure an easy to 

understand demonstration of how often 

the ETF traded at a premium or 

discount. However, the tabular 

disclosure does not allow investors to 

observe the degree of those deviations, 

particularly during periods of market 

stress. For example, two ETFs may have 

traded at a discount for the same 

number of days. One ETF’s daily 

deviations could have been small with 

little effect on investors trading on those 

days, whereas the other ETF could have 

had significant discounts. These 

distinctions would not be apparent 

based on the required tabular 

disclosure, but would be observable 

with the graphic disclosure we are 

proposing. As a result, in order to assist 

investors with understanding an ETF’s 

premiums and discounts, we are 

proposing both tabular and graphical 

representations of daily premium and 

discounts.305 In order to eliminate 

potentially duplicative disclosure 

requirements, we are proposing to 

eliminate historical premium/discount 

disclosure requirements in Item 11(g)(2) 

and Item 27(b)(7)(iv) of Form N–1A.306

Proposed rule 6c–11(c)(1)(v) also 

would require any ETF whose premium 

or discount was greater than 2% for 

more than seven consecutive trading 

days to post that information on its 

website, along with a discussion of the 

factors that are reasonably believed to 

have materially contributed to the 

premium or discount. We propose that 

ETFs posting this information be 

required to post it on their websites on 

the trading day immediately following 

the day on which the ETF’s premium or 

discount triggered this provision (i.e., 

on the trading day immediately 

following the eighth consecutive trading 

day on which the ETF had a premium 

or discount greater than 2%) and 

maintain it on their websites for at least 

one year following the first day it was 

posted. 

We believe that this proposed 

disclosure of information about ETFs’ 

premiums and discounts would 

promote transparency regarding the 

significance and/or persistency of 

deviations between market price and 

NAV per share, and thus may permit 

investors to make more informed 


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307See supra footnotes 119–120 and 

accompanying text. 

308This belief is based on data obtained from 

Morningstar and Bloomberg. 

309See infra footnote 477 and accompanying text. 

310See Tom Lyndon, China A-Shares ETFs 

Trading at Steep Discount to NAV, ETF Trends (Jul. 

9, 2015), available at http://www.etftrends.com/ 

2015/07/china-a-shares-etfs-trading-at-steepdiscount-to-nav/ (reporting that U.S.-listed China Ashares ETFs were trading at a steep discount to the 

underlying market because of the fact that a 

significant number of companies stopped trading on 

China’s mainland stock exchanges). 

311We recognize that historical information 

relating to these deviations may not be predictive 

of future deviations, and request comment below 

regarding whether the rule should require ETFs to 

include a legend in proximity to the historical 

information warning of its limitations. 

312For our specific requests for comment 

regarding an ETF’s daily portfolio and basket 

website disclosure, see our discussions of those 

subjects, at supra sections II.C.4 and II.C.5, 

respectively. 

313See NYSE Arca Rule 1.1(ll) (defining how 

official closing price is determined if the exchange 

does not conduct a closing auction or if a closing 

auction trade is less than a round lot); see also 

Securities Exchange Act Release No. 82907 (March 

20, 2018) [83 FR 12980 (March 26, 2018)] (order). 

investment decisions. This information 

also may provide the market (and the 

Commission) with information 

regarding the efficiency of an ETF’s 

arbitrage mechanism. As noted above, in 

the Commission’s experience, the 

deviation between the market price of 

ETFs and NAV per share, averaged 

across broad categories of ETF 

investment strategies and over time 

periods of several months, has been 

relatively small.307 Therefore, we 

believe that limiting this disclosure to 

ETFs that have a premium or discount 

of greater than 2% for more than seven 

consecutive trading days would serve to 

highlight potentially unusual 

circumstances when an ETF has a 

persistent premium or discount.308

Given the proposed threshold, we do 

not believe that many ETFs would be 

required to disclose this information.309

However, there could be certain 

categories of ETFs that could be 

particularly affected. An ETF that 

invests in foreign securities, for 

example, may be more likely to 

experience a persistent deviation 

between market price and NAV per 

share given that many foreign markets 

are closed during the U.S. trading day. 

Such deviations may be pronounced if 

the market on which the ETF’s 

underlying securities trade is closed.310

The proposed rule would require the 

disclosure to include a discussion of the 

factors that are reasonably believed to 

have contributed to the premium or 

discount. We believe that this 

requirement would provide secondary 

market investors with useful context for 

the disclosed deviations. In addition, we 

believe that requiring ETFs to maintain 

it on their website for at least one year 

following the first day it was posted 

would identify those ETFs that 

historically have had such an instance 

of persistent deviation between market 

price and NAV per share.311

We request comment on our proposed 

website disclosure requirements for 

ETFs.312

• Would the proposed website 

disclosures be useful in informing 

investors of certain ETF characteristics 

and risks? For example, would the 

disclosures alert investors to the 

relationship between NAV per share 

and the market price of the ETF’s 

shares? Would they assist investors in 

understanding that they may sell or 

purchase ETF shares at prices that do 

not correspond to NAV per share of the 

ETF or that may reflect a premium or 

discount to NAV per share that is not in 

line with the typical premium or 

discount for the same ETF? Would they 

assist investors in assessing costs 

associated with premiums and 

discounts and/or bid-ask spreads? 

Would the proposed requirements 

promote the goals of enhancing 

transparency and encouraging market 

discipline on ETFs? Understanding that 

ETF investors would be required to 

access each ETF’s website, would this 

information allow investors to compare 

data across ETFs? Should we require 

ETFs to present their disclosures in a 

structured format on their websites or in 

a filing with the Commission in order to 

facilitate comparisons among ETFs? 

• To what extent would the proposed 

website disclosure requirements 

increase ETFs’ costs or result in 

operational challenges? 

• Should we require that information 

regarding NAV per share, market price, 

and premiums and discounts be posted 

on an ETF’s website each business day 

as proposed? Should we specify the 

time by which such information must be 

posted? For example, should we require 

that an ETF post the information on its 

website before the opening of trading 

each business day? 

• Should we define ‘‘market price’’ as 

proposed? Does the proposed definition 

provide ETFs with too much discretion 

in determining market price? Should we 

define market price using only the 

‘‘official closing price’’? Is there an 

alternative price that we should require 

instead of ‘‘official closing price’’ that 

would more accurately reflect the ETF’s 

share price at market close? Should we 

provide an alternative calculation of 

market price, by using the midpoint of 

the NBBO, as proposed? Is the midpoint 

of the NBBO an appropriate alternative? 

If not, what method is appropriate? Do 

ETFs and their service providers 

currently receive the NBBO for their 

securities? If not, what are the 

additional costs, if any, of receiving a 

NBBO quote? Should we require ETFs 

to disclose if, for example, they use the 

midpoint of the NBBO rather than the 

official closing price? Should we define 

an alternative closing price? For 

example, should we use a definition 

similar to the one used by NYSE 

ARCA? 313 Alternatively, should we 

adopt the definition of ‘‘market price’’ 

currently used in Form N–1A, which 

may provide even more discretion by 

not referencing the midpoint? What 

definition of market price would 

provide the most accurate presentation 

of market value? Would there be 

investor confusion because of the 

proposed change? 

• Does calculating premiums and 

discounts using market close 

information provide investors with 

information they would use? 

• Should we instead require a 

calculation and disclosure of an intraday premium or discount as compared 

to the next-calculated NAV? How would 

investors use the disclosure of intraday 

deviations between market prices and 

the next-calculated NAV? Would such 

disclosure be costly and/or burdensome 

to produce? What calculation 

methodology should we require for this 

disclosure? For example, should we 

require ETFs to disclose information 

regarding the difference between: (i) The 

mean or median of execution prices on 

a business day; and (ii) the nextcalculated NAV per share, in order to 

capture situations where deviations 

between market price and NAV per 

share significantly widened during the 

trading day, but were tightly correlated 

at the time as of which NAV is 

calculated? Alternatively, should we 

require ETFs to disclose information 

regarding the difference between: (i) The 

midpoint of the NBBO calculated every 

minute; and (ii) the next-calculated 

NAV? If so, should the midpoint of the 

NBBO be calculated more or less 

frequently? Are there other ways to 

calculate intraday market prices that 

would provide investors with 

meaningful information regarding 

intraday deviations between market 

price and NAV per share? If we require 

this type of disclosure, should it be in 

addition to, or an alternative of, current 

premium/discount disclosures? 

Alternatively, would 5th and/or 95th 

percentile data be useful in this context? 

How frequently should ETFs disclose 


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37364 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

314For the purposes of this comment request, we 

consider the effective spread the ‘‘actual’’ spread 

(i.e., the difference between bid and the ask). We 

consider the average spread to be the figure that 

takes the average bids and asks over a period of 

time and finds the difference between them. As 

noted in the comment request, we also are soliciting 

input on calculation methodology. 

315See supra footnote 120 (describing calculation 

of absolute value). 

information regarding intraday 

deviations between market prices and 

the next-calculated NAV? How long 

should ETFs be required to maintain 

this information on their website? 

• Should we instead require 

calculation and disclosure of an intraday premium or discount as compared 

to the contemporaneous value of the 

ETF’s portfolio? How would investors 

use the disclosure of intraday deviations 

between market price and the 

contemporaneous value of the ETF’s 

portfolio? Would such disclosure be 

costly and/or burdensome to produce? 

What calculation methodology should 

we require for this disclosure? For 

example, despite the limitations of the 

IIV in the context of arbitrage activity, 

could the IIV be useful for the 

measurement and long-term tracking of 

an ETF’s intraday market prices? If so, 

should we prescribe a uniform 

methodology for the calculation of the 

IIV? Should we require ETFs to value 

their portfolio holdings more frequently 

for purposes of assessing any deviations 

between market prices and the ETF’s 

portfolio holdings, such as hourly or 

three times a day? Are there other ways 

to value an ETF’s portfolio on an 

intraday basis that we should consider? 

How frequently should ETFs disclose 

information regarding intraday 

deviations with the contemporaneous 

value of the ETF’s portfolio? How long 

should ETFs be required to maintain 

this information on their website? 

• Alternatively, should we require 

ETFs to assess the efficiency of their 

arbitrage mechanism pursuant to 

internal methodologies and require 

ETFs to provide narrative disclosure 

regarding intraday deviations between 

market price and (i) NAV; (ii) the 

contemporaneous value of the ETF’s 

portfolio; or (iii) both? 

• We are proposing to require ETFs to 

disclose the ETF’s median bid-ask 

spread for the most recent fiscal year. 

How would investors use this 

information? Is the median bid-ask 

spread an appropriate metric? For 

example, the median bid-ask spread 

would not capture extreme events and 

stress periods. Should we require 

additional bid-ask spread metrics, such 

as average spread, high-end spread (e.g., 

95th percentile) or effective spread? 314

If so, why is it preferable and how 

should it be calculated? Should we 

require ETFs to provide the median or 

mean spreads for the year? 

• Should we require that the bid-ask 

spread information be included on both 

an ETF’s website and in its prospectus? 

Would investors benefit from having 

this information in both places? Should 

we instead require it only on an ETF’s 

website? Should the information be 

required to be updated more or less 

frequently than proposed? If so, how 

frequently? For example, should we 

require an ETF to disclose on its website 

a trailing average spread over the course 

of a year, updated daily? Are there 

particular categories of investors that 

may not use or have access to the 

internet? If so, are there alternative ways 

of communicating this information to 

them in a cost-effective manner? 

• Proposed rule 6c–11(c)(1)(iii) would 

require an ETF to post on its website a 

table showing the ETF’s premiums and 

discounts for the most recently 

completed calendar year and the most 

recently completed calendar quarters of 

the current year. As we discussed above, 

this disclosure is a condition in many of 

our exemptive orders and required by 

Form N–1A. Do investors or their 

advisers use this information? Are there 

other forms of presenting this data that 

would be easier for investors to 

understand? 

• Proposed rule 6c–11(c)(1)(iv) would 

require an ETF to post on its website a 

line graph showing the ETF’s premiums 

and discounts for the most recently 

completed calendar year and the most 

recently completed calendar quarters of 

the current year. How would investors 

and their advisers use a line graph? Are 

there other forms of presenting this data 

that would be easier for investors to 

understand? 

• Should ETFs be required to include 

intra-day premiums and discounts 

(calculated using one of the 

methodologies for which we request 

comment above) as part of the line 

graph? How would this disclosure be 

used by investors? 

• Should we require ETFs to provide 

both forms of disclosure (i.e., table and 

line graph)? Would investors use this 

information? Should we require more 

layered disclosure, such as an 

interactive tool where investors can 

enter different variables to better 

understand historical premiums and 

discounts? 

• Should the table and line graph 

cover the most recently completed 

calendar year and the most recently 

completed calendar quarters of the 

current year as proposed or are there 

other periods we should consider? 

Should the period be longer or shorter? 

Should we consider fiscal year periods 

instead of calendar year periods? If so, 

what period and why? How would this 

change impact the comparability of the 

information across ETFs? In order to 

give investors more information on 

market dislocations that particularly 

affect ETFs, should we also require 

tabular and graphic disclosure for major 

market events over past five or ten 

years? 

• Proposed rule 6c–11(c)(1)(v) would 

require any ETF whose premium or 

discount was greater than 2% for more 

than seven consecutive trading days to 

post that information on its website, 

along with a discussion of the factors 

that are reasonably believed to have 

materially contributed to the premium 

or discount threshold. Should we 

require this proposed disclosure? Is 2% 

an appropriate premium or discount? If 

not, should we consider a higher or 

lower threshold for this disclosure (e.g., 

1% or 5%)? If so, why? Should we vary 

the premium or discount based on other 

factors, such as fund strategy, asset 

class, geographic region, or historic 

premium/discount for the class? Should 

we instead base the reporting threshold 

on a different statistic, such as standard 

deviation? Should it be based on the 

average absolute value of the premium 

or discount over a seven-day period? 315

• Is the seven consecutive trading day 

requirement appropriate? Should we 

require a shorter or longer period of 

time? If so, what period and why? Is 

there a more appropriate balance 

between the magnitude (2%) and length 

(seven consecutive trading days) of an 

ETF’s premium or discount than we 

have proposed (e.g., 10% for one day or 

5% for two days)? 

• Should we permit ETFs to 

determine what percentage premium or 

discount threshold is appropriate and 

what time period to disclose, based on 

the ETF’s particularized circumstances? 

• Should we require any additional 

measures to trigger the proposed rule 

6c–11(c)(1)(v) disclosure requirement? 

Should we require a second measure of 

non-consecutive days in addition to the 

seven trading day requirement? For 

example, should we also require a 

disclosure of factors if the ETF’s 

premium or discount was greater than 

2% for seven of the past 30 days? 

• We propose that ETFs posting this 

information be required to post it by the 

end of the trading day immediately 

following the day on which the 

requirement was triggered. Is this a 

reasonable period of time to post this 

information? Why or why not? We also 

propose that ETFs posting this 


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316See Item 4(b)(2)(i) of Form N–1A. 

317See 2008 ETF Proposing Release, supra 

footnote 3. Commenters who addressed this aspect 

of the 2008 proposal generally supported this 

condition. See ICI 2008 Comment Letter; Katten 

2008 Comment Letter; Xshares 2008 Comment 

Letter. 

318The proposed website disclosure requirements 

are described in section II.C.6 and the proposed 

amendments to Form N–1A are described in section 

II.H. 

319The 2008 proposed rule, consistent with the 

use of the term in section 24(b) of the Act and the 

existing definition in rule 34b–1 under the Act, 

would have defined the term ‘‘sales literature’’ as 

‘‘any advertisement, pamphlet, circular, form letter, 

or other sales material addressed to or intended for 

distribution to prospective investors other than a 

registration statement filed with the Commission 

under section 8 of the Act.’’ See 2008 ETF 

Proposing Release, supra footnote 3. 

320Rule 156 under the Securities Act defines the 

term ‘‘sales literature’’ to include ‘‘any 

communication (whether in writing, by radio, or by 

television) used by any person to offer to sell or 

induce the sale of securities of any investment 

company.’’ It also states that communications 

between issuers, underwriters and dealers are 

included in the definition of sales literature if such 

communications, or the information contained 

therein, can be reasonably expected to be 

communicated to prospective investors in the offer 

or sale of securities or are designed to be employed 

in either written or oral form in the offer or sale of 

securities. See 17 CFR 230.156(c). 

information be required to maintain it 

on their websites for at least one year 

following the first day it was posted. 

Should these time periods be shorter or 

longer? 

• As an alternative (or in addition) to 

requiring disclosure of this information 

on an ETF’s website, should we require 

disclosure in an ETF’s prospectus or 

shareholder reports? Or should we 

require that it be publicly filed on 

EDGAR in a different regulatory filing? 

• Would this disclosure requirement 

disproportionately affect particular 

types of ETFs? Would investors use this 

information in assessing ETFs, or could 

it lead to confusion? 

• Should we require a discussion of 

the factors that are reasonably believed 

to have materially contributed to the 

premium or discount? Would this 

requirement provide investors with 

useful context for deviations between 

market price and NAV per share or 

would ETFs rely on boilerplate 

disclosure? 

• Should we provide additional 

guidance or impose additional 

requirements for cases where a 

deviation persists for an extended 

period (i.e., much longer than seven 

days)? 

• In addition to the disclosures 

regarding instances where the premium 

or discount was greater than 2% for 

more than seven consecutive trading 

days, should we require that ETFs 

disclose other information relating to 

premiums and discounts? For example, 

should we require ETFs to disclose 

rolling average premium and discount 

for a prior period? If so, what period? 

Should we require ETFs to provide the 

greatest premium and/or discount for 

the previous month, quarter, or year? If 

so, what period would be most useful to 

investors and other market participants? 

• Should we require ETFs to disclose 

index tracking error, if applicable? If so, 

how should we define tracking error? 

For what period should we require 

tracking error? Where should such 

disclosure be made and how frequently? 

• Should we require ETFs to include 

a disclaimer indicating the potential 

limitations of historical disclosures on 

its website? If so, should the rule 

prescribe the legend that should be used 

and where the legend should be placed? 

Should we require a legend similar to 

the current performance-related 

disclosure legend in Form N–1A, which 

states that ‘‘past performance . . . is not 

necessarily an indication of how the 

Fund will perform in the future’’? 316

• We are proposing that ETFs provide 

certain disclosures on their websites on 

a daily basis. Should we require funds 

to provide these disclosures less 

frequently? Are there other places that 

funds should be required to report this 

information? 

• Should we require this information 

to be posted ‘‘prominently’’ on the 

ETF’s website? Should we provide any 

other instruction as to the presentation 

of this information, in order to highlight 

the information and/or lead investors 

efficiently to the information? For 

example, should we require that the 

information be posted on the main page 

of a particular ETF series? Should the 

information be accessible in no more 

than two clicks from the ETF complex’s 

home page? Should we adopt 

presentation requirements that would 

aid in the comparability of this 

information for different ETFs? In 

particular, should we adopt 

presentation requirements for the 

premium/discount line graph? 

• In our discussion of the proposed 

amendments to Item 3 of Form N–1A, 

we are proposing an exception from the 

disclosure requirements of trading 

information and related costs for newly 

created ETFs with limited trading 

history. Should there be a similar 

exception for newly created ETFs from 

the website disclosure requirements of 

the ETF’s NAV per share, market price, 

premium or discount, and bid-ask 

spreads as of the end of the prior 

business day? Should the exception 

apply to the requirement to disclose 

historical information regarding the 

ETF’s premiums and discounts? Why or 

why not? 

• Should we require ETFs to post the 

proposed additional website disclosures 

in a structured format and/or to file 

them on EDGAR or make them available 

in another centralized repository? 

7. Marketing 

Our exemptive orders and our 2008 

proposal included a condition requiring 

each ETF to identify itself in any sales 

literature as an ETF that does not sell or 

redeem individual shares and to explain 

that investors may purchase or sell 

individual ETF shares through a broker 

via a national securities exchange.317

This condition was designed to help 

prevent investors, particularly retail 

investors, from confusing ETFs with 

mutual funds. Given that ETFs have 

been available for over 26 years, and the 

market has developed a familiarity with 

the product, we no longer believe this 

condition is necessary. We believe that 

retail investors generally understand 

that, unlike mutual funds, individual 

ETF shares may be purchased and sold 

only on secondary markets. We further 

believe that the website and registration 

statement disclosures we are proposing 

provide retail investors more useful 

information regarding the exchangetraded nature and costs of ETFs.318

Therefore, we are not proposing to 

include such a marketing disclosure 

requirement in rule 6c–11. 

We request comment on this aspect of 

our proposal. 

• Are we correct that a condition 

requiring an ETF to identify itself in any 

sales literature as an ETF that does not 

sell or redeem individual shares and to 

explain that investors may purchase or 

sell individual ETF shares through a 

broker via secondary markets is no 

longer necessary? Do retail investors 

understand that individual ETF shares 

can be bought and sold only on 

secondary markets? If not, should 

proposed rule 6c–11 condition relief on 

the inclusion of statements in an ETF’s 

sales literature regarding the purchase 

and sale of ETF shares on secondary 

markets? Alternatively, should we 

consider adding a disclosure 

requirement only to Form N–1A? 

• Should we consider other 

limitations regarding ETF sales 

literature? 

• If the rule includes such a 

condition, how should we define sales 

literature? Should we define sales 

literature as we proposed in 2008? 319

Are there other definitions that we 

should consider, including by reference 

to the definition in 17 CFR 230.156 

(‘‘rule 156’’)? 320


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321See supra section I. 

322Proposed rule 6c–11(a) (defining ‘‘authorized 

participant’’). 

323See proposed rule 6c–11(d)(1). 

324See 2008 ETF Proposing Release, supra 

footnote 3. Our orders also do not include a specific 

preservation requirement. See, e.g., Salt Financial, 

supra footnote 270. 

325See proposed rule 6c–11(d)(2). 

326We understand transaction fees are imposed 

by ETFs to defray the transaction expenses 

associated with the creation or redemption, as 

applicable, and prevent possible dilution resulting 

from the purchase or redemption of creation units. 

For cash baskets, the ETF may assess transaction 

fees to offset certain operational, brokerage and 

spread costs relating to the ETF’s purchasing or 

selling of securities. Transaction fees can impact 

secondary market investors in ETF shares because 

an authorized participant or other market maker can 

cause the spread to widen on ETF shares to recoup 

or offset some of the costs from paying the 

transaction fees. 

• If the rule included a condition 

regarding sales literature, should it also 

include an exception to permit an ETF 

to disclose to investors that it will issue 

or redeem individual shares in order to 

consummate a reorganization, merger, 

conversion or liquidation? 

• To further prevent investors from 

confusing ETFs with mutual funds, 

should the rule require an ETF to 

include the identifier ‘‘ETF’’ in its 

name? 

• To further prevent investors from 

confusing ETFs with mutual funds, 

should the rule require an ETF to 

explicitly disclose in its sales literature 

that shareholders may pay more than 

NAV when buying shares and may 

receive less than NAV when selling ETF 

shares? 

• Should the rule impose any 

additional conditions or require any 

additional disclosures to help investors 

distinguish ETFs from other ETPs, such 

as exchange-traded notes or commodity 

pools that are not subject to the 

Investment Company Act? Should the 

Commission consider proposing naming 

conventions based on these or other 

distinctions in a future rulemaking? Are 

naming conventions useful to investors? 

Should ETFs be required to use a 

different identifier (e.g., ‘‘IC’’ for ETFs 

that are registered under the Investment 

Company Act) before or after ‘‘ETF’’ to 

distinguish them from other ETPs? 

Should all ETPs be required to have 

identifiers (e.g., ETF–N (for exchangetraded notes), ETF–IC (for ETFs that are 

not leveraged ETFs), ETF–C (for 

exchange-traded commodity pools), 

ETF–L (for leveraged ETFs))? 

• Alternatively, are there ways we 

could address investor confusion by 

restricting certain sales practices? For 

example, should we consider proposing 

restrictions in a future rulemaking on 

how intermediaries communicate with 

retail investors about ETPs unless they 

disclose certain information designed to 

clearly differentiate ETPs that are not 

registered under the Act from ETFs that 

are registered investment companies? 

D. Recordkeeping 

For the reasons discussed above, 

authorized participants play a central 

role in the proper functioning of the 

ETF marketplace.321 One of the defining 

characteristics of authorized 

participants under the proposed rule is 

that they have a written agreement with 

an ETF or one of the ETF’s service 

providers whereby the authorized 

participant is allowed to purchase or 

redeem creation units directly from the 

ETF (‘‘authorized participant 

agreement’’).322 Thus, these agreements 

are critical to understanding the 

relationship between the authorized 

participant and the ETF. While we 

believe that most ETFs are currently 

preserving copies of their written 

authorized participant agreements 

pursuant to our current recordkeeping 

rules, for avoidance of doubt, we are 

proposing to expressly require that ETFs 

relying on rule 6c–11 preserve and 

maintain copies of all such 

agreements.323

This requirement is designed to 

provide our examination staff with a 

basis to determine whether the 

relationship between the ETF and the 

authorized participant is in compliance 

with the requirements of proposed rule 

6c–11 and other provisions of the Act 

and rules thereunder, based on the 

specific terms of their written 

agreement, including, but not limited to, 

terms related to postponement of 

redemptions and transaction fees. We 

did not include a specific preservation 

requirement for authorized participant 

agreements in the 2008 proposal.324

However, Commission staff’s experience 

with the ETF industry since 2008, 

including our examination staff’s 

experience, has reinforced our belief 

that authorized participant agreements 

must be preserved. 

We are also proposing to require ETFs 

to maintain information regarding the 

baskets exchanged with authorized 

participants. In particular, the proposed 

rule would require an ETF to maintain 

records setting forth the following 

information for each basket exchanged 

with an authorized participant: (i) The 

names and quantities of the positions 

composing the basket; (ii) identification 

of the basket as a ‘‘custom basket’’ and 

a record stating that the custom basket 

complies with the ETF’s custom basket 

policies and procedures (if applicable); 

(iii) cash balancing amounts (if any); 

and (iv) the identity of the authorized 

participant conducting the 

transaction.325 These records would 

provide our examination staff with a 

basis to understand how baskets are 

being used by ETFs, as well as to 

evaluate compliance with the rule and 

other provisions of the Act and rules 

thereunder. In particular, we believe 

these records would allow our 

examination staff to evaluate whether 

the use of custom baskets is appropriate. 

ETFs would be required to maintain 

these records for at least five years, the 

first two years in an easily accessible 

place. The retention period is consistent 

with the period provided in rules 22e– 

4 and 38a–1(d) under the Act. Funds 

currently have compliance programrelated recordkeeping procedures in 

place that incorporates this type of 

retention period, and we preliminarily 

believe consistency with that period 

would minimize any compliance 

burden to funds. 

We request comment on these 

proposed recordkeeping requirements. 

• Are these requirements necessary in 

light of the benefits that would result 

from Commission examination? Are 

there other records that we should 

require ETFs to preserve or other 

feasible alternatives that would 

minimize recordkeeping burdens? What 

are the costs associated with 

maintaining the proposed recordkeeping 

requirements under the rule and what 

effects would the proposed 

recordkeeping requirements have on an 

ETF’s compliance policies and 

procedures? 

• Do ETFs already preserve their 

agreements with authorized participants 

under our current recordkeeping 

requirements? 

• Should we require an ETF to 

maintain a record stating that the 

custom basket complies with the ETF’s 

custom basket policies and procedures? 

Is there any additional information that 

we should require ETFs to maintain in 

connection with their baskets? Should 

we require ETFs to record information 

regarding any transaction fees assessed 

in connection with each basket? Are 

there alternatives to this proposed 

recordkeeping requirement that would 

enable the Commission to examine the 

composition of ETFs’ baskets, while 

minimizing the recordkeeping burdens 

imposed on ETFs? 

• Are there other records we should 

consider requiring ETFs to maintain 

regarding transaction fees? 326 Should 

we consider requiring ETFs to disclose 

information regarding transaction fees 


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327See 15 U.S.C. 80a–18(f)(1) and (i); 17 CFR 

270.18f–3. Section 18(f)(1) of the Act generally 

prohibits a fund from issuing a class of ‘‘senior 

security,’’ which is defined in section 18(g) to 

include any stock of a class having priority over any 

other class as to distribution of assets or payment 

of dividends. See 15 U.S.C. 80a–18(g). Section 18(i) 

of the Act provides that all shares of stock issued 

by a fund must have equal voting rights. 

328See Exemption for Open-End Management 

Investment Companies Issuing Multiple Classes of 

Shares, Investment Company Act Release No.19955 

(Dec. 15, 1993) [58 FR 68074 (Dec. 23, 1993)] 

(proposing release), at nn.20 and 21 and 

accompanying text. 

329See id. 

330See Exemption for Open-End Management 

Investment Companies Issuing Multiple Classes of 

Shares, Investment Company Act Release No. 20915 

(Feb. 23, 1995) [60 FR 11876 (Mar. 2, 1995)] 

(adopting release) (‘‘Multiple Class Adopting 

Release’’), at n.8 and accompanying text. 

331See 17 CFR 270.18f–3(a)(4). 

332See Vanguard Index Funds, et al., Investment 

Company Act Release Nos. 24680 (Oct. 6, 2000) [65 

FR 61005 (Oct. 13, 2000)] (notice) and 24789 (Dec. 

12, 2000) (order) and related application; Vanguard 

Index Funds, et al., Investment Company Act 

Release Nos. 26282 (Dec. 2, 2003) [68 FR 68430 

(Dec. 8, 2003)] (notice) and 26317 (Dec. 29, 2003) 

(order) and related application; Vanguard 

International Equity Index Funds, et al., Investment 

Company Act Release Nos. 26246 (Nov. 3, 2003) [68 

FR 63135 (Nov. 7, 2003)] (notice) and 26281 (Dec. 

1, 2003) (order) and related application; Vanguard 

Bond Index Funds, et. al., Investment Company Act 

Release Nos. 27750 (Mar. 9, 2007) [72 FR 12227 

(Mar. 15, 2007)] (notice) and 27773 (Apr. 25, 2007) 

(order) and related application (collectively, the 

‘‘Vanguard orders’’). 

333These costs can include brokerage and other 

costs associated with buying and selling portfolio 

securities in response to mutual fund share class 

cash inflows and outflows, cash drag associated 

with holding the cash necessary to satisfy mutual 

fund share class redemptions, and distributable 

capital gains associated with portfolio transactions. 

334See, e.g., T. Rowe Price Associates, Inc., et al., 

Investment Company Act Release Nos. 30299 (Dec. 

7, 2012) [77 FR 74237 (Dec. 13, 2012)] (notice) and 

30336 (Jan. 2, 2013) (order) and related application; 

SSgA Funds Management, Inc., et al., Investment 

Company Act Release Nos. 29499 (Nov. 17, 2010) 

[75 FR 71753 (Nov. 24, 2010)] (notice) and 29524 

(Dec. 13, 2010) (order) and related application 

(‘‘SSgA’’). 

in their registration statement or on 

Form N–CEN? For example, should 

ETFs be required to describe transaction 

fees and the amount of such fees that are 

charged in connection with effecting 

purchases and redemptions of creation 

units? Should there be disclosure about 

the aggregate dollar amount or 

percentage of transaction fees paid over 

particular periods? Should we require 

ETFs to disclose the dollar amount (or 

percentage) of transaction fees waived 

over a particular periods? If so, how 

should this information be presented? 

Should we require ETFs to include 

narrative disclosure regarding waivers, 

noting for example, that the waiver of 

transaction fees may result in additional 

costs borne by the ETF? 

• Should we require ETFs to maintain 

these records for five years, the first two 

years in an easily accessible place, as 

proposed? Should we use a different 

retention period, such as the six-year 

retention period under 17 CFR 270.31a– 

2 (rule 31a–2 under the Act)? 

• Would compliance with these 

proposed requirements have any effect 

on ETFs’ internal compliance policies 

and procedures? 

• Should we instead, or additionally, 

require that ETFs file their authorized 

participant agreements as exhibits to 

their registration statements? Why or 

why not? 

• Are there any additional alternative 

recordkeeping requirements we should 

consider? 

E. Share Class ETFs 

The proposed rule does not provide 

any relief from sections 18(f)(1) or 18(i) 

of the Act or expand the scope of 17 

CFR 270.18f–3 (‘‘rule 18f–3’’ under the 

Act) (the multiple class rule).327

Sections 18(f) and (i) of the Act were 

intended, in large part, to protect 

investors from certain abuses associated 

with complex investment company 

capital structures, including conflicts of 

interest among a fund’s share classes.328

These provisions also were designed to 

address certain inequitable and 

discriminatory shareholder voting 

provisions that were associated with 

many investment company securities 

before the enactment of the Act.329

In 1995, the Commission adopted rule 

18f–3 under the Act to create a limited 

exemption from sections 18(f)(1) and 

18(i) for funds that issue multiple 

classes of shares with varying 

arrangements for the distribution of 

securities and provision of services to 

shareholders.330 That rule generally 

provides that, notwithstanding sections 

18(f)(1) and 18(i) of the Act, a registered 

open-end management investment 

company or series or class thereof may 

issue more than one class of voting 

stock, provided that each class, among 

other requirements, has in all other 

respects the same rights and obligations 

as each other class.331

An ETF cannot rely on rule 18f–3 to 

operate as a share class within a fund 

because the rights and obligations of the 

ETF shareholders would differ from 

those of investors in the fund’s mutual 

fund share classes. For example, ETF 

shares would be redeemable only in 

creation units, while the investors in the 

fund’s mutual fund share classes would 

be individually redeemable. Similarly, 

ETF shares are tradeable on the 

secondary market, whereas mutual fund 

shares classes would not be traded. 

An ETF structured as a share class of 

a fund that issues multiple classes of 

shares representing interests in the same 

portfolio would not be permitted to rely 

on proposed rule 6c–11. We recognize 

that the Commission has granted ETFs 

exemptive relief from the 

aforementioned provisions of section 18 

of the Act in the past, subject to various 

conditions.332 However, relief from 

section 18 raises policy considerations 

that are different from those we seek to 

address in this rule, which is intended 

to address broadly the common type of 

relief that most ETFs have sought. 

For example, an ETF share class that 

transacts with authorized participants 

on an in-kind basis and a mutual fund 

share class that transacts with 

shareholders on a cash basis may give 

rise to differing costs to the portfolio. As 

a result, while certain of these costs may 

result from the features of one share 

class or another, all shareholders would 

generally bear these portfolio costs.333

At the same time, the share class 

structure also can provide benefits to 

each share class, including economies of 

scale. Given these additional policy 

considerations, we believe it is 

appropriate for ETFs to continue to 

request relief from sections 18(f)(1) and 

18(i) of the Act through our exemptive 

application process, and for the 

Commission to continue to weigh these 

policy considerations in the context of 

the facts and circumstances of each 

particular applicant. 

We request comment on this aspect of 

the proposal. 

• Should proposed rule 6c–11 

include exemptions from sections 

18(f)(1) or 18(i) of the Act, or should we 

expand the scope of rule 18f–3 under 

the Act? Why or why not? 

• If commenters believe that such 

exemptions should be included in the 

proposed rule, should the rule include 

conditions designed to take into account 

the potential costs and benefits of a fund 

with both mutual fund and ETF share 

classes? If so, what conditions? Are we 

correct in our preliminary belief that 

combining an ETF share class with 

traditional share classes of a mutual 

fund may, in certain circumstances, 

result in the costs and benefits 

described above? 

F. Master-Feeder ETFs 

Many of our recent ETF orders 

contain relief allowing ETFs to operate 

as feeder funds in a master-feeder 

structure.334 In general, an ETF that 

operates as a feeder fund in a masterfeeder structure functions like any other 

ETF. An authorized participant deposits 

a basket with the ETF and receives a 


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335Section 12(d)(1) of the Act limits the ability of 

a fund to invest substantially in shares of another 

fund. See sections 12(d)(1)(A)–(C) of the Act; see 

also infra footnote 344. Section 12(d)(1)(E) of the 

Act allows an investment company to invest all of 

its assets in one other fund so that the acquiring 

fund is, in effect, a conduit through which investors 

may access the acquired fund. See section 

12(d)(1)(E)(ii) of the Act. 

336Relief from the affiliated transaction 

prohibitions in sections 17(a)(1) and 17(a)(2) of the 

Act is necessary because these sections would 

otherwise prohibit the feeder ETF and its master 

fund from selling to or buying from each other the 

basket assets in exchange for securities of the 

master fund. See 15 U.S.C. 80a–17(a)(1)–(2). 

337See 15 U.S.C. 80a–22(e) (generally requiring 

the satisfaction of redemptions within seven days). 

See also supra section III.B.4. 

338See supra footnote 333 and accompanying 

text. 339See, e.g., SSGA Active Trust Prospectus (Oct. 

31, 2017), available at https://us.spdrs.com/public/ 

SPDR_ACTIVE%20ETF%20TRUST_

PROSPECTUS.pdf. 340See infra section II.G. 341Based on staff analysis, we preliminarily 

believe that the fund complex currently utilizing 

this relief operates nine master-fund arrangements, 

each involving only one ETF as the sole feeder 

fund. See SSgA, supra footnote 334. 342Rescinding the relief for existing master-feeder 

ETFs would require them to change the manner in 

which they invest. For example, transactions 

between each of the affected master funds and its 

corresponding feeder fund could be transacted in 

cash, rather than in-kind, obviating any need for 

exemptive relief for the feeder fund to hold 

securities other than those issued by the master 

fund. Alternatively, the feeder funds could opt to 

pursue their investment objectives through direct 

investments in securities and/or other financial 

instruments, rather than through investments in 

master funds. 

343See section 38(a) of the Act, 15 U.S.C. 80a– 

37(a). 

344Section 12(d)(1) generally limits the ability of 

registered investment companies (including ETFs) 

to acquire securities issued by other investment 

companies in excess of certain thresholds, and the 

ability of registered open-end investment 

companies (including ETFs) from knowingly selling 

securities to other investment companies in excess 

of certain thresholds. The conditions set forth in 

ETF exemptive applications for relief necessary to 

create a fund of funds structure is generally 

designed to prevent the abuses that led Congress to 

enact section 12(d)(1), including abuses associated 

with undue influence and control by acquiring fund 

shareholders, the payment of duplicative or 

excessive fees, and the creation of complex 

structures. See Salt Financial, supra footnote 270. 

We also note that certain standalone exemptive 

orders, unrelated to ETF operations, are often 

granted to applicants to permit investments in ETFs 

beyond the limits in section 12(d)(1) of the Act; we 

are not proposing to rescind such exemptive orders. 

345See supra section II.B.3. 

creation unit of ETF shares in return for 

those assets. Conversely, an authorized 

participant that redeems a creation unit 

of ETF shares receives a basket from the 

ETF. In a master-feeder arrangement, 

however, the feeder ETF then also 

enters into a corresponding transaction 

with its master fund. The ETF may use 

the basket assets it receives from an 

authorized participant to purchase 

additional shares of the master fund, or 

it may redeem shares of the master fund 

in order to obtain basket assets and 

satisfy a redemption request. 

Because the feeder ETF may, in the 

course of these transactions, temporarily 

hold the basket assets, it would not be 

able to rely on section 12(d)(1)(E) of the 

Act, which requires that a feeder fund 

hold no investment securities other than 

securities of the master fund.335 To 

accommodate these unique operational 

characteristics of ETFs, our recent 

exemptive orders have allowed a feeder 

ETF to rely on section 12(d)(1)(E) 

without complying with section 

12(d)(1)(E)(ii) of the Act to the extent 

that the ETF temporarily holds 

investment securities other than the 

master fund’s shares for use as basket 

assets. These orders also provided the 

feeder ETF and its master fund with 

relief from sections 17(a)(1) and 17(a)(2) 

of the Act, with regard to the deposit by 

the feeder ETF with the master fund and 

the receipt by the feeder ETF from the 

master fund of basket assets in 

connection with the issuance or 

redemption of creation units,336 and 

section 22(e) of the Act if the feeder ETF 

includes a foreign security in its basket 

assets and a foreign holiday (or a series 

of consecutive holidays) prevents timely 

delivery of the foreign security.337

The exemptive orders we have 

granted to master-feeder ETFs, however, 

do not include relief from section 18 

under the Act inasmuch as investment 

by several feeder funds or by mutual 

fund and ETF feeder funds in the same 

class of securities issued by a master 

fund generally do not involve a senior 

security subject to section 18. We are 

concerned, as discussed above, that if an 

ETF feeder fund transacts with a master 

fund on an in-kind basis, but non-ETF 

feeder funds transact with the master 

fund on a cash basis, all feeder fund 

shareholders would bear costs 

associated with the cash transactions.338

We understand that while many 

orders contain this relief, only one fund 

complex has established master-feeder 

arrangements involving ETF feeder 

funds, and each arrangement involves 

an ETF as the sole feeder fund.339 Given 

the lack of interest in this structure and 

our concerns noted above, we are 

proposing to rescind the master-feeder 

relief granted to ETFs that do not rely 

on the relief as of the date of this 

proposal (June 28, 2018).340 However, 

we also propose to grandfather existing 

master-feeder arrangements involving 

ETF feeder funds, but prevent the 

formation of new ones, by amending 

relevant exemptive orders.341 Because 

these existing master-feeder ETFs 

involve only one feeder fund for each 

master fund, we do not believe they 

would raise the policy concerns 

discussed above so long as they do not 

add feeders, and therefore do not 

believe it is necessary to require these 

structures to change their existing 

investment practices.342

We request comment on the lack of 

master-feeder relief in proposed rule 6c– 

11. 

• Are we correct that the market 

interest for ETFs using master-feeder 

structures, as discussed above, is 

limited? 

• Should the proposed rule include 

master-feeder relief for ETFs, as 

provided in certain of our exemptive 

orders and discussed above? Why or 

why not? 

• Should we amend the exemptive 

relief relied upon by existing masterfeeder arrangements? Alternatively, 

should we also rescind the masterfeeder relief relied upon by existing 

arrangements? If so, how would these 

ETFs be impacted if we also rescinded 

their relief? 

• If the proposed rule provided 

master-feeder relief for master-feeder 

structures that include ETF and mutual 

fund feeder funds, should the rule 

include conditions designed to take into 

account the potential costs and benefits 

of such structures? If so, what 

conditions? For example, should the 

proposed rule require a determination 

that the investment in a master fund is 

in the best interest of the ETF and its 

shareholders? If so, who should be 

required to make such a determination? 

How frequently should such a 

determination be made? Alternatively, 

should the proposed rule provide 

master-feeder relief for master-feeder 

structures but allow only ETF feeder 

funds? If so, what conditions should 

apply? 

G. Effect of Proposed Rule 6c–11 on 

Prior Orders 

The Commission has authority under 

the Act to amend or rescind our orders 

when necessary or appropriate to the 

exercise of the powers conferred 

elsewhere in the Act. Pursuant to this 

authority, we are proposing to amend 

and rescind the exemptive relief we 

have issued to ETFs that would be 

permitted to rely on the proposed 

rule.343 Our proposed rescission of 

orders would specifically be limited to 

the portions of an ETF’s exemptive 

order that grant relief related to the 

formation and operation of an ETF and, 

with the exception of certain masterfeeder relief discussed above in section 

II.F, would not rescind the relief from 

section 12(d)(1) 344 and sections 17(a)(1) 

and (a)(2) 345 under the Act related to 


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346ETF exemptive relief typically segregates 

exemptive relief from section 17(a) under the Act 

necessary to create a fund of funds structure from 

section 17(a) exemptive relief necessary for the 

operation of the ETFs. This segregation of ‘‘Fund of 

Funds Relief’’ and ‘‘ETF Relief’’ appears in 

numerous representations and enumerated 

conditions set forth in applications for exemptive 

relief. See, e.g., Salt Financial, supra footnote 270. 

347See supra footnote 12. 

348See e.g., PowerShares, supra footnote 188; 

Javelin Exchange-Traded Trust, Investment 

Company Act Release Nos. 28350 (July 31, 2008) 

[73 FR 46066 Aug. 7, 2008)] (notice) and 28637 

(Aug. 26, 2008) (order) and related application. In 

some cases, the automatic expiration condition 

applies to the ETF-related relief only, and expressly 

does not apply to certain other exemptive relief 

requested, such as master-feeder and ‘‘fund of 

funds’’ relief under section 12 of the Act. See, e.g., 

Fidelity Merrimack Street Trust, et al., Investment 

Company Act Release Nos. 30464 (Apr. 16, 2013) 

[78 FR 23793 (Apr. 22, 2013)] (notice) and 30513 

(May 10, 2013) (order) and related application 

(‘‘The requested relief, other than the Fund of 

Funds Relief and the Section 17 relief related to a 

master-feeder structure, will expire on the effective 

date of any Commission rule under the Act that 

provides relief permitting the operation of actively 

managed exchange traded funds.’’). 

349See 2008 ETF Proposing Release, supra 

footnote 3. 

350See proposed rule 6c–11(c)(3); see also supra 

section II.C.5. We note that a subset of the ETFs 

operating under exemptive relief has basket 

flexibility that would not be broadened by the 

proposed rule. Under the proposed rule, however, 

such ETFs would be required to adopt and 

implement written policies and procedures related 

to the construction of baskets and the process for 

the acceptance of baskets by the ETF. 

351See discussion of ETFs organized as UITs, 

supra section II.A.1. 

352See Vanguard orders, supra footnote 332. 

353See discussion of leveraged ETFs, supra 

section II.A.3. 

fund of funds arrangements involving 

ETFs.346

The terms of the exemptive relief 

granted to ETFs have evolved over time 

and have resulted in an uneven playing 

field among ETF complexes, subjecting 

ETFs that pursue the same or similar 

investment strategies to different 

operational requirements. Moreover, 

many ETF complexes have multiple 

exemptive orders permitting them to 

operate ETFs. Some of those orders 

contain different conditions for relief 

and different representations by the 

applicants regarding how the ETFs 

formed pursuant to the order would 

operate. Many of those orders also 

provide relief for future ETFs created 

pursuant to the terms of a particular 

exemptive order.347 As a result, ETF 

complexes with multiple orders can 

effectively choose the exemptive relief 

that would be applicable to a new ETF 

by selecting what legal entity should 

form the new ETF series. Moreover, 

differences in the terms of our various 

orders have had varying impact on the 

structure and costs of an ETF. For 

example, shares of an ETF with a less 

flexible basket condition in its order 

could have wider spreads than a 

similarly situated ETF with more 

flexible basket compositions. However, 

investors may not be able to discern the 

difference between these two ETFs’ 

orders. As we have stated elsewhere in 

this release, among our goals in 

proposing rule 6c–11 is to create a 

consistent, transparent and efficient 

regulatory framework for many ETFs. 

We do not believe this goal would be 

furthered if ETFs that could rely on the 

rule continue to rely on those orders. 

In addition, we began including a 

condition in our ETF exemptive orders 

in 2008 stating that the relief permitting 

the operation of ETFs would expire on 

the effective date of any Commission 

rule that provides relief permitting the 

operation of ETFs.348 The purpose of 

this automatic expiration condition was 

to better establish equal footing between 

ETFs that have received exemptive 

relief and ETFs that may rely solely on 

a Commission rule, and to reduce 

competitive advantages that could 

potentially arise out of the conditions 

for relief set forth in our earlier 

exemptive orders.349 Of the 

approximately 300 orders we have 

issued that provide ETF exemptive 

relief, approximately 200 include this 

automatic expiration condition, and 

thus the ETF relief would terminate if 

and when proposed rule 6c–11 is 

adopted and goes into effect. To provide 

time for ETFs to transition to rule 6c– 

11, however, we propose to amend these 

existing orders to provide that the ETF 

relief contained in those orders will 

terminate one year following the 

effective date of any final rule. Absent 

this modification or our determining to 

delay the effectiveness of any final rule 

6c–11, the ETF relief included in orders 

with the automatic expiration provision 

could expire before ETFs were able to 

make any adjustments necessary to rely 

on rule 6c–11. 

We believe that rescinding ETF 

exemptive relief in connection with the 

proposed rule (and amending those 

orders that require ETF exemptive relief 

to automatically expire in order to allow 

a transitional period to any final rule) 

would result in a more transparent 

framework for covered ETFs, as those 

ETFs would no longer be subject to 

differing and sometimes inconsistent 

provisions of their exemptive relief. The 

relief and related conditions proposed 

under rule 6c–11, moreover, are largely 

consistent with our recent orders, and in 

some cases, provide ETFs with 

additional flexibility. For example, 

proposed rule 6c–11 would provide 

many ETFs with additional basket 

flexibility beyond what is currently 

permitted by their exemptive orders.350

We preliminarily believe, therefore, that 

the operations of most existing ETFs 

would not be significantly negatively 

affected by the need to comply with the 

requirements of rule 6c–11 as opposed 

to their exemptive relief. However, in 

order to limit any hardship that 

revocation of existing exemptive relief 

would have on current ETFs with orders 

that do not automatically expire, we are 

proposing a one-year period after the 

effective date before we rescind that 

exemptive relief to give those ETFs time 

to bring their operations into conformity 

with the requirements of proposed rule 

6c–11. 

We do not propose to rescind the 

exemptive relief of ETFs that would not 

be permitted to rely on the proposed 

rule. Specifically, we do not propose to 

rescind the exemptive relief for ETFs 

organized as UITs,351 ETFs that are 

organized as a share class of a fund,352

or leveraged ETFs.353 We believe it is 

appropriate for ETFs seeking to utilize 

these structures to continue to request 

relief from the Commission through our 

exemptive application process, and for 

the Commission to continue to make 

facts-and-circumstances-based 

determinations regarding whether such 

relief is appropriate for any particular 

applicant. 

The Commission does not believe that 

it is necessary to give individual 

hearings to the holders of the prior 

exemptive relief or to any other person. 

Proposed rule 6c–11 would be 

prospective in effect and is intended to 

set forth for covered ETFs the 

Commission’s exemptive standards for 

ETFs organized as open-end funds. 

Recipients of existing exemptive relief 

may make their views known in the 

context of the comment process that 

accompanies this rulemaking, and those 

views will be given due consideration. 

Finally, investment companies would 

be able to request Commission approval 

to operate as an ETF under conditions 

that differ from those in proposed rule 

6c–11. 

We request comment on our proposal 

to revoke existing ETF and certain 

existing master-feeder exemptive relief. 

• Should we revoke some or all of the 

existing ETF exemptive relief? If not, 

why not? Would allowing existing 

exemptive relief to continue create an 

unequal playing field for ETF market 

participants? If not, why not? 

• As discussed above, we are 

proposing a one year period before 

rescinding existing ETF exemptive 

relief. Is the one year period appropriate 

for ETFs with existing ETF exemptive 


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37370 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

354See rule 498 under the Securities Act [17 CFR 

230.498]. 

355All of the definitions discussed in this section 

would appear in Proposed General Instruction A of 

Form N–1A. 

356Specifically, the proposed definition of 

‘‘exchange-traded fund’’ would be a fund or class, 

the shares of which are listed and traded on a 

national securities exchange, and that has formed 

and operates under an exemptive order granted by 

the Commission or in reliance on rule 6c–11 under 

the Act. 

357 General Instruction A to Form N–1A. 

358See, e.g., proposed changes to Item 3 of Form 

N–1A. 

359 Item 11(a)(1) of Form N–1A. Also, in addition 

to the defined term ‘‘Market Price,’’ Form N–1A 

currently uses the undefined term ‘‘market price’’ 

in several instances where a more general use of the 

term is appropriate. See, e.g., Instruction 3 to Item 

11(g) of Form N–1A. Our proposed amendments to 

the Form also include the use of the undefined term 

‘‘market price.’’ See, e.g., proposed changes to Item 

3 of Form N–1A. 

relief to bring their funds into 

compliance with rule 6c–11? If not, how 

long should this period last? Why? We 

are proposing to implement this one 

year period, in part, by amending 

existing orders with an automatic 

expiration condition to provide that the 

ETF exemptive relief contained in these 

orders would terminate one year 

following the effective date of any final 

rule. Should we, instead, delay the 

effectiveness of rule 6c–11 for one year? 

Are there different approaches we 

should consider? 

• Should we consider rescinding the 

exemptive relief for ETFs organized as 

UITs or ETFs organized as a share class 

of a fund and instead allow such ETFs 

to be covered by rule 6c–11? If so, how 

would such ETFs comply with the 

requirements of the rule? For example, 

would they have to restructure or 

liquidate? 

• Should we, as proposed, rescind the 

exemptive relief that we have 

previously granted that allows ETFs to 

operate as feeder funds in a masterfeeder structure if they do not rely on 

the relief as of the date of this proposal? 

Do funds plan to use this relief in the 

future? If so, what kind of ETF masterfeeder structures do funds envision 

creating? For what purpose? 

• We understand that the existing 

structures are organized with an ETF as 

the sole feeder fund. Is this 

understanding correct? Should we 

amend the exemptive relief applicable 

to these funds as proposed? 

• Would our proposal to rescind 

certain of our previously issued ETF 

exemptive relief, and allow the ETF 

exemptive relief contained in the orders 

with automatic expiration provisions to 

expire one year following the effective 

date of rule 6c–11, eliminate any 

competitive advantages arising from the 

relief we have granted via exemptive 

order? 

• Would existing ETFs face 

significant challenges in complying 

with the conditions of rule 6c–11 rather 

than exemptive relief? 

• Should we consider other 

approaches? For example, should we 

consider rescinding only ETF exemptive 

relief previously granted to ETF 

complexes that have multiple exemptive 

orders permitting them to operate ETFs? 

• Should we consider not rescinding 

any of the approximately 100 pre-2008 

orders that do not include the automatic 

expiration provision? Should we 

consider amending the orders that 

contain the automatic expiration 

provision of the ETF exemptive relief to 

remove that provision? Under these 

approaches, in which certain ETF 

exemptive orders would be left in place, 

ETFs would continue operating under 

different sets of conditions. Would 

permitting ETFs to operate under 

different sets of conditions have an 

adverse effect on competition and 

capital formation? 

• Are there other approaches to the 

existing ETF exemptive relief that we 

should consider in view of proposed 

rule 6c–11? 

• Exemptive relief granted prior to 

2009 generally includes relief from 

section 24(d) of the Act to exempt 

broker-dealers selling ETF shares from 

the obligation to deliver prospectuses in 

most secondary market transactions, 

and the rescission of the ETF exemptive 

relief from those orders would eliminate 

this relief. We understand, however, 

that broker-dealers have not relied upon 

this relief and, subsequent to the 

adoption of amendments to rule 498 

under the Securities Act permitting the 

delivery of an ETF’s summary 

prospectus, most market participants 

use the summary prospectus to satisfy 

prospectus delivery obligations.354 Are 

we correct in our understanding? 

Should we provide relief from section 

24(d) for ETFs that have this relief in 

their exemptive orders if we were to 

rescind those orders? If so, why? 

H. Amendments to Form N–1A 

As discussed above in section II.C.6, 

because of the exchange-traded nature 

of ETFs, ETF investors may be subject 

to different costs than mutual fund 

investors. For example, while an ETF 

may, in some cases, have a lower 

expense ratio than a comparable mutual 

fund, an ETF investor will be subject to 

certain unique costs associated 

specifically with ETFs, such as the bidask spread and premiums and discounts 

from the ETF’s NAV. As a result of these 

differences, ETF investors may not be 

fully aware of the full costs associated 

with their investment in an ETF. 

We therefore are proposing several 

amendments to Form N–1A, the 

registration form used by open-end 

funds to register under the Act and to 

offer their securities under the 

Securities Act. The proposed 

amendments are designed to provide 

investors who purchase ETF shares in 

secondary market transactions with 

additional information regarding ETFs, 

including information regarding costs 

associated with an investment in ETFs. 

The proposal also would eliminate 

certain disclosures that would be 

duplicative of the proposed 

amendments to Item 3 of Form N–1A 

regarding the exchange-traded nature of 

ETFs. Finally, we are requesting 

comment on whether we should create 

a new ETF-specific registration form. 

1. Definitions 

We are proposing several 

amendments to Form N–1A to reflect 

the adoption of proposed rule 6c–11.355

First, we are proposing to amend the 

definition of ‘‘Exchange-Traded Fund’’ 

in Form N–1A to add a specific 

reference to proposed rule 6c–11.356

Currently, Form N–1A defines 

‘‘Exchange-Traded Fund’’ to include a 

fund or class that has formed and 

operates in reliance on an exemptive 

rule adopted by the Commission.357 We 

believe that Form N–1A should make 

specific reference to proposed rule 6c– 

11, rather than a generic exemptive rule, 

and that this change would be 

consistent with Form N–1A’s general 

approach of referring specifically to 

exemptive rules in other defined terms. 

Second, we propose to remove the 

defined term ‘‘Market Price’’ from the 

Definitions section of Form N–1A in 

light of our other proposed changes to 

Form N–1A. Market Price, as presently 

defined in Form N–1A, is used in 

several items that we are proposing to 

eliminate from the Form.358 The 

remaining instances in which ‘‘Market 

Price’’ is used do not require the use of 

a defined term, as they contemplate a 

more general use of the term, such as 

the requirement in Item 11 of Form N– 

1A that an ETF explain in its prospectus 

that the price of its shares is based on 

Market Price.359 Accordingly, given our 

proposed changes to Form N–1A, we do 

not believe it is necessary to include 

‘‘Market Price’’ as a defined term, and 

propose to remove this definition from 

the Form. 

We request comment on the proposal 

to amend the definition section of Form 

N–1A. 

• Should we, as proposed, revise the 

definition of the term ‘‘Exchange-Traded 


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360 Item 3 of Form N–1A. 361See General Instruction C.3.g.(i) to Form N– 

1A. 362Proposed amendments to Item 3 of Form N– 

1A. In order to eliminate duplicative disclosures, 

we are proposing to amend Instruction 1(e) of Item 

3 to eliminate the requirement that ETFs modify the 

narrative explanation for the fee table to state that 

investors may pay brokerage commissions on their 

purchase and sale of ETF shares, which are not 

reflected in the example. We are also proposing to 

eliminate the instruction that funds may only 

exclude fees charged for the purchase and 

redemption of the Fund’s creation units if the fund 

issues or redeems shares in creation units of net less 

than 25,000 shares. Thus, as proposed, an ETF may 

exclude from the fee table any fees charged for the 

purchase and redemption of the Fund’s creation 

units regardless of the number of shares. See 

proposed Instruction 1(e)(ii) to Item 3; see also 

proposed Instruction 1(e)(ii) to Item 27(d)(1) 

(proposing the same modification for the expense 

example in an ETF’s annual and semi-annual 

reports); see also infra footnote 397 and 

accompanying and following text. 

363Proposed amendments to Item 3 of Form N– 

1A. 

364See SEC Office of Investor Education and 

Advocacy, Investor Bulletin: How Fees and 

Expenses Affect Your Investment Portfolio (Feb. 

2014), available at https://www.sec.gov/investor/ 

alerts/ib_fees_expenses.pdf, at 2 (‘‘As with any fee, 

transaction fees will reduce the overall amount of 

your investment portfolio.’’); see also Andrea 

Coombes, Calculating the Costs of an ETF, The Wall 

Street Journal (Oct. 23, 2012), available at https:// 

www.wsj.com/articles/SB100008723963904440

24204578044293008576204. 

365Alex Bryan & Michael Rawson, The Cost of 

Owning ETFs and Index Mutual Funds, Morningstar 

Manager Research (Dec. 1, 2014), available at http:// 

global.morningstar.com/us/documents/pr/Cost-OfOwning-Index-ETF-MFS.pdf, at 15 (‘‘While trading 

commissions are the most conspicuous component 

of trading costs, indirect trading costs, such as the 

bid-ask spread and market impact of trading can 

often be more important.’’). 

366Proposed amendments to Item 3 of Form N– 

1A. 

Fund’’ in Form N–1A to make specific 

reference to proposed rule 6c–11? 

• Should we, as proposed, remove the 

defined term ‘‘Market Price’’ from the 

Definitions section of the General 

Instruction to Form N–1A? 

Alternatively, should we replace the 

current definition with a reference to 

the defined term ‘‘Market price,’’ as 

defined in proposed rule 6c–11? 

2. Item 3 of Form N–1A 

Item 3 of Form N–1A requires funds 

to include a table describing the fees 

and expenses investors may pay if they 

buy and hold shares of the fund. Item 

3 does not currently distinguish 

between ETFs and mutual funds, and 

only requires disclosure of sales loads, 

exchange fees, maximum account fees 

and redemption fees that funds charge 

directly to shareholders.360 We therefore 

are proposing several amendments to 

this Item to clarify that there are certain 

fees that are not reflected in the fee table 

for both mutual funds and ETFs and to 

require new disclosure requirements 

that capture ETF-specific trading 

information and costs. Like all 

information disclosed in Items 2, 3, or 

4 of Form N–1A, the information 

disclosed in amended Item 3 would 

have to be tagged and submitted in a 

structured data format.361

a. Changes That Affect Mutual Funds 

and ETFs 

First, we are proposing a narrative 

disclosure that would clarify that, in 

addition to the current disclosures 

relating to investors who buy or hold 

shares, the fees and expenses reflected 

in the Item 3 expense table may be 

higher for investors if they sell shares of 

the fund.362 This amendment would be 

applicable to both mutual funds and 

ETFs given that an investor may incur 

expenses other than redemption fees 

when selling shares of either a mutual 

fund or ETF. For example, although less 

common than they were in the past, an 

investor may incur a back-end sales load 

when selling a mutual fund share. 

Likewise, an investor may bear costs 

associated with bid-ask spreads when 

selling ETF shares. 

We are also proposing to require a 

statement that investors may be subject 

to other fees not reflected in the table, 

such as brokerage commissions and fees 

to financial intermediaries.363 We 

believe this is appropriate disclosure for 

both ETFs and mutual funds because 

brokerage commissions and fees to 

financial intermediaries could be 

applicable to ETFs and mutual funds 

alike. 

b. Changes That Affect ETFs 

Because ETF shares are exchangetraded, secondary market investors in 

ETF shares are subject to trading costs, 

such as bid-ask spreads, that are not 

currently required to be disclosed under 

Item 3. Trading costs, like all costs and 

expenses, affect investors’ returns on 

their investment.364 In addition, some 

investors use ETFs more heavily as 

trading vehicles compared to mutual 

funds, and the extent of the trading 

costs borne by an investor depends on 

how frequently the investor trades ETF 

shares. We believe that investors could 

overlook these costs and that additional 

disclosure would help them better 

understand the total costs of investing 

in an ETF. Disclosure would also 

facilitate comparisons between different 

investment options.365

As a result, we are proposing a new 

section in Item 3 that would require 

disclosure of certain ETF trading 

information and trading costs.366 This 

proposed section is formatted as a series 

of question and answers (‘‘Q&As’’). We 

believe this format would help facilitate 

an investor’s understanding of certain 

terminology and cost calculations. The 

proposed Q&A disclosures would 

require information related to the 

trading of ETFs on the secondary market 

and the costs associated with such 

trading. The specific question and 

answer disclosures are shown in Figure 

1 below. 


daltland on DSKBBV9HB2PROD with PROPOSALS4
37372 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

Q&A 1. Currently, Item 6(c) of Form 

N–1A requires that ETFs disclose that: 

(i) Shares may only be purchased and 

sold on a national securities exchange 

through a broker-dealer; and (ii) the 

price of ETF shares is based on market 


daltland on DSKBBV9HB2PROD with PROPOSALS4EP31JY18.016</GPH>

Exchange-Traded Fund Trading Information 

and Related Costs 

What information dn I need to know about how the Exchange-Traded Fund 

("ETF'J trades? 

Individual shares of an ETF may only be bought and sold in the 

secondary market throughabroken~·dealerat a market price. The market 

price can change throughout the day due to the supply of and demand 

for ETF shares, and changes in the value of the Fund's underlying 

investments. among other reasons. Because ETF shares trade at market 

prices rather than net asset value, shares may trade at a price greater than 

net asset value (premium) or less than net asset value (discount). 

Tt'hat costs are associated with trading shares of an ETF? 

An investor may incur costs when buying or selling shares on an 

exchange that are in addition to the costs described above. Examples 

include brokerage commissions, costs attributable to the bid-ask spread, 

and costs attributable to premiums and discounts. 

What is the bid-ask spread? 

111c bid-ask spread is the difference between the highest price a buyer is 

willing to pay to purchase shares of the Fund (hid) and the lowest price 

seller is willing to acceptl(lr shares ofthe Fund (ask). TI1e bid-ask 

spread can change throughout the day due to the supply of or demand 

f()r ETF shares, the quantity of shares traded, and the time of day the 

trade is executed, among other ±:1ctors. For the ETF' s most recent fiscal 

year ended r ]. the median bid-ask spread was 

I XX.XX%. 

How does the bid-ask spread impact my retum 011 investment? 

111c impact of the bid-ask spread depends on your trading practices. For 

example, based on the ETF's ±!seal year-end data, purchasing $10,000 

worth of ETF shares and then immediately therealler selling $10,000 

worth ofETF shares (i.e., a "round-trip"). your cost, in dollars, would be 

as follows: 

I•' or a SI:-.IGLE round-trip (each trade being $10,000) 

Assuming mid-range spread cost: s ____ _ 

Assuming high-end spread cost: s ____ _ 

But what if1 plan to trade ETF shares frequent{p? 

Ba,ed on the ETF's most recent fiscal year-end data, completing 25 

round-trips of$1 0,000 each, your cost, in dollars, would be as HJ!lows: 

li'or 25 rmmd-trips (each trade being $10,000) 

Mid-range spread cost: s ____ _ 

High-end spread cost: s ____ _ 

1Hz ere can I get more trading infonnation for the ETF"! 

111e ETF's website at [www.[Series-SpecificLandingPage.com]] 

includes recent information on the Fund's net a<;set value, market price, 

premiums and discounts, as well as an interactive calculator you can use 

to determine how the bid-a-;k spread would impact your specific 

investment. 

Figure 1 
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37373 

367 Item 6(c) of Form N–1A. 

368See proposed amendments to Item 3 of Form 

N–1A. 

369As discussed above, given the importance of 

this information to understanding the total 

expenses an investor may bear when investing in 

an ETF, we propose that bid-ask spread information 

be included in both the ETF’s prospectus and on 

the ETF’s website. Proposed Instruction 5(a) to Item 

3 of Form N–1A. See also infra section II.C.6. 

370CFA Institute Research Foundation, 

Comprehensive Guide to Exchange-Traded Funds 

(ETFS) (2015), available at https://

www.cfapubs.org/doi/pdf/10.2470/rf.v2015.n3.1, at 

67–8 (‘‘CFA Guide’’). See also Allen B. Atkins & 

Edward A. Dyl, Transactions Costs and Holding 

Periods for Common Stocks, 52 Journal of Finance 

1, 309–325 (1997) (‘‘Additional evidence of an 

association between transactions costs and trading 

volume can be found in the literature on bid-ask 

spreads.’’). Literature also suggests that the bid-ask 

spread could be affected by increased transaction 

costs. See Gerald W. Buetow & Brian J. Henderson, 

Are Flows Costly to ETF Investors?, 40 Journal of 

Portfolio Management 3, 101 (Spring 2014), 

available at http://www.bfjlaward.com/pdf/25949/ 

100-112_Henderson_JPM_0417.pdf (noting that 

authorized participants are likely to pass 

transaction fees onto shareholders through the 

spread). 

371See CFA Guide, supra footnote 370, at 69 

(noting that ‘‘for some ETFs, even though the 

underlying securities are liquid, bid–ask spreads 

may be wide simply because the ETF trades so little 

that the chances of an [authorized participant] 

rolling up enough volume to use the creation/ 

redemption process are low’’). 

372Proposed Instruction 5(a) to Item 3 of Form N– 

1A. 

373Proposed Instruction 5(b) to Item 3 of Form N– 

1A. 

374Ogden H. Hammond & Michael Lieder, J.P. 

Morgan Asset Management, Debunking myths about 

ETF liquidity (May 2015), available at https://

am.jpmorgan.com/blob-gim/1383272223898/83456/ 

1323416812894_Debunking-myths-about-ETFliquidity.pdf, at 6 (noting that certain ETF liquidity 

patterns tend to repeat and are well known to 

veteran traders, such as limited trading of ETFs 

immediately prior to the close). See also Sunil 

Wahal, Entry, Exit, Market Makers, and the Bid-Ask 

Spread, 10 Rev. Financial Stud 871 (1997), 

available at http://www.acsu.buffalo.edu/ 

∼keechung/MGF743/Readings/H1.pdf (‘‘Large-scale 

entry (exit) is associated with substantial declines 

(increases) in quoted end-of-day inside spreads, 

even after controlling for the effects of changes in 

volume and volatility. The spread changes are 

larger in magnitude for issues with few market 

makers; however, even for issues with a large 

number of market makers, substantial changes in 

quoted spreads take place.’’). 

375For example, if the ETF’s fiscal year end was 

August 31, the annual update would be required to 

be filed no later than December 29, which would 

include spread cost information from the prior 

calendar year for up to one year thereafter, meaning 

that the spread cost information could be almost 

two years old. By using fiscal year end data, the 

information would never be more than 16 months 

old. 

price, and since ETFs trade at market 

prices rather than at net asset value, 

shares may trade at a price greater than 

net asset value (premium) or less than 

net asset value (discount).367 We are 

proposing to move this description from 

Item 6 to Q&A 1 in Item 3. We believe 

that moving this information to Item 3 

would consolidate relevant disclosures 

regarding ETF trading costs and provide 

the investor with helpful background 

information relating to ETF trading.368

We also propose to replace the reference 

to ‘‘national securities exchange’’ with a 

reference to ‘‘secondary markets’’ to 

reflect that ETFs can be bought and sold 

over the counter or on an alternative 

trading system in addition to their 

primary listing exchanges. 

Q&A 2. The second Q&A we are 

proposing identifies the specific costs 

associated with trading shares of an 

ETF, such as brokerage commissions, 

bid-ask spread costs, and potential costs 

attributable to premiums and discounts. 

This question clarifies that the costs 

being discussed in the questions that 

follow should be considered in addition 

to the costs previously discussed in the 

fee table. 

Q&A 3. Proposed Q&A 3 would 

include ETF-specific disclosures 

relating to the median bid-ask spread for 

the ETF’s most recent fiscal year.369

Costs attributable to the bid-ask spread 

may increase or decrease when certain 

market conditions exist or certain 

factors are present. We believe that this 

disclosure would inform investors 

regarding the potential impact of spread 

costs, including for investors who 

frequently trade ETF shares. We also 

believe that disclosure regarding median 

bid-ask spreads would provide a helpful 

metric for ETF investors to determine an 

ETF’s historic liquidity, since a 

narrower bid-ask spread typically 

signals higher liquidity and a wider bidask spread generally signals lower 

liquidity.370 Investors can use the bidask spread to assess the ETF’s 

tradability in comparison to other 

similar ETFs.371

The proposed Q&A would describe 

the bid-ask spread as the difference 

between the highest price a buyer is 

willing to pay to purchase shares of the 

ETF (bid) and the lowest price a seller 

is willing to accept for share of the ETF 

(ask). We are proposing to require this 

description because some investors may 

not be familiar with the term ‘‘bid-ask 

spread,’’ making it difficult for them to 

meaningfully analyze the specific bidask spread number that we propose to 

include in this Q&A. The proposed Q&A 

also would explain that the bid-ask 

spread can change throughout the day 

due to the supply of or demand for ETF 

shares, the quantity of shares traded, 

and the time of day the trade is 

executed, among other factors. 

In addition, we are proposing that an 

ETF calculate and disclose its median 

bid-ask spread over the most recently 

completed fiscal year.372 We propose 

that the median bid-ask spread be 

calculated by using trading data from 

each trading day of the ETF’s prior fiscal 

year.373 Each daily bid-ask spread 

would be calculated by taking the 

average of the intraday bid-ask spreads, 

which are measured by using the best 

bid and best ask, respectively, at tensecond intervals throughout the trading 

day. We understand that this is a widely 

accepted method for calculating the bidask spread and believe that using the 

best bid and ask would be 

administratively easier and less 

burdensome than other methods of 

calculating the bid and ask price, such 

as weighting or averaging bid and ask 

prices throughout the trading day. We 

propose that the bid-ask spread be 

calculated by taking the difference 

between the bid and the ask and 

dividing that difference by the midpoint 

between the bid and the ask. The 

median would be expressed as a 

percentage, rounded to the nearest 

hundredth percent. 

As proposed, an ETF would be 

required to use data from the full 

trading day without excluding certain 

time periods, because we believe the 

spread metric should represent the costs 

that an actual investor could face at any 

time during the day. We note, however, 

that costs related to the bid-ask spread 

can fluctuate throughout the day. For 

example, the bid-ask spread tends to be 

higher at the beginning of the trading 

day and towards the end of the trading 

day.374 At market open, wide spreads 

may persist until all underlying stocks 

open and start trading. At market close, 

market makers may be less willing to 

purchase ETF shares because they do 

not want to hold the ETF shares 

overnight. 

We propose to require ETFs to use 

one full fiscal year of data because we 

believe a full year would capture 

spreads during varying market events 

throughout the year. Although we 

considered requiring ETFs to use a full 

calendar year of data for this disclosure 

requirement in order to promote greater 

comparability among ETFs, we are 

concerned that using calendar year data 

would necessarily mean that 

information in certain ETF prospectuses 

would be over a full year old.375 We 

preliminarily believe that, to the extent 

there are any concerns that using fiscal 

year data instead of calendar year data 

may undermine comparability of the 

spreads of different ETFs when there are 

significant market events in a particular 

calendar year, such concerns are 

mitigated by the relatively low impact of 

a single market event to a full year’s 


daltland on DSKBBV9HB2PROD with PROPOSALS4
37374 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

376See Item 3 of Form N–1A. 

377The proposal uses $10,000 in order to 

maintain consistency with the cost example in Item 

3 of Form N–1A. 

378Proposed Instruction 5(b) to Item 3 of Form N– 

1A. 

379 Item 3 of Form N–1A. Item 3 only requires 1- 

and 3-year expense examples for annual fund 

operating expenses for ‘‘New Funds.’’ 

380We acknowledge the inherent difficulty of 

setting a number of trades that reflects an ‘‘average 

investor.’’ Based on staff experience, however, we 

preliminarily believe that 50 total trades, which 

represents approximately 2 round-trip transactions 

per month, is a reasonable figure to utilize for the 

purposes of demonstrating the costs of trading for 

a frequent trader in Q&A 5. 

381See proposed Instruction 5(e) to Item 3 of 

Form N–1A. 

382We are proposing to divide the bid-ask spread 

by two on the assumption that the value of an ETF 

share is the midpoint between the bid price and the 

ask price. Therefore, the ‘‘cost’’ attributable to the 

bid-ask spread of executing one trade would be, in 

the case of purchasing a share of an ETF, the 

difference between the ask price and the midpoint 

between the bid and the ask prices—in other words, 

this difference would represent the cost above 

which the share was valued for this purpose and 

not the full ‘‘round-trip’’ cost. Likewise, in the case 

of selling an ETF share, the ‘‘cost’’ attributable to 

the bid-ask spread of executing one trade would be 

the difference between the bid and the midpoint 

between the bid and the ask prices. To calculate the 

cost of multiple trades, the single trade cost would 

be multiplied by the number of transactions. 

median bid-ask spread. Using one full 

fiscal year of data also is consistent with 

all other requirements for Item 3 of 

Form N–1A.376

Under our proposal, an ETF would be 

required to disclose median bid-ask 

spread instead of average bid-ask spread 

because we believe the median spread 

better represents the spread that the 

average investor would experience, 

whereas the average spread better 

represents the spread of an average ETF 

share in a given transaction. We believe 

sorting the spreads across the entire 

fiscal year to determine the median— 

rather than taking the median spread of 

each trading day throughout the fiscal 

year first, sorting each day’s median, 

and taking the median spread across all 

trading days—provides a better 

representation of the true median across 

the entire fiscal year. Requiring 

disclosure of the median bid-ask spread 

also avoids the problem of an outlier 

skewing the bid-ask spread figure. For 

example, if the spread is .05 in nine 

instances but 1.00 in one instance, then 

the average spread will be 0.145 which 

we believe is a less accurate reflection 

of the bid-ask spread for that fund. 

Q&A 4 and 5. We also propose to 

require ETFs to include questions on 

how the bid-ask spread impacts the 

return on a hypothetical $10,000 

investment for both buy-and-hold and 

frequent traders.377 These examples are 

designed to allow secondary market 

investors to see the impact that bid-ask 

spreads can have on the investor’s 

trading expenses and ultimately the 

return on investment. For example, a 

hypothetical example of spread costs 

can highlight that these costs can be a 

drag on returns for someone who trades 

frequently in certain types of ETFs. On 

a percentage basis, spread costs for a 

single trade can equal, if not exceed, the 

ETF’s annual operating expenses in 

some cases. If an investor trades in and 

out of an ETF several times within a 

relatively short period of time, the costs 

attributable to the bid-ask spread can 

increase rapidly. Transparency into 

trading costs also may promote greater 

comparability among ETFs and other 

investment products, such as mutual 

funds. For example, two ETFs may have 

very similar expense ratios, but one ETF 

consistently has higher bid-ask spreads, 

which could make the cost of that ETF 

significantly higher than the one with a 

low bid-ask spread. 

The proposed example in Q&A 4 

would require disclosure of 

hypothetical trading costs attributable 

solely to the median bid-ask spread 

based on data from the ETF’s prior fiscal 

year.378 Specifically, the spread costs 

example would demonstrate the 

hypothetical impact of the ETF’s bid-ask 

spread for one $10,000 ‘‘round-trip’’ 

trade (i.e., one buy and sell transaction). 

The proposed example reflects costs 

that are in addition to the annual fund 

operating expenses, which are currently 

disclosed in Item 3 of N–1A.379 Thus, to 

assist investors with comparing the 

costs of investing in various ETFs, we 

believe that it is appropriate to use the 

same hypothetical investment amount, 

$10,000, which is used for the current 

expense example in Item 3 of Form N– 

1A. 

To illustrate that more frequent 

trading can significantly increase costs, 

the proposed example in Q&A 5 

demonstrates the costs associated with 

25 $10,000 round-trip trades (50 total 

trades). This figure represents 

approximately two round-trip trades 

each month. While the number of trades 

that an investor makes during the course 

of a year can vary depending on the type 

of investor and the type of investment 

strategy the ETF pursues, we believe 

that an example showing the spread 

costs of 50 total trades could provide 

useful information for those that trade 

frequently.380 As discussed in more 

detail below, our proposal also would 

allow investors to obtain more tailored 

information regarding their costs on the 

ETF’s website.381

Pursuant to this requirement, an ETF 

would be required to disclose ‘‘midrange spread costs’’ and ‘‘high-end 

spread costs.’’ The mid-range spread 

costs would be calculated by using the 

median spread, divided by two, and 

then multiplying the resulting number 

by a $10,000 trade size and the number 

of transactions. The high-end spread 

costs would be calculated by using the 

same calculated spread data from the 

ETF’s prior fiscal year, except instead of 

choosing the median spread, the 

disclosure would represent the 95th 

percentile spread, after sorting that 

year’s data.382 We preliminarily believe 

that utilizing the 95th percentile spread 

(i.e., the spread representing the 

threshold for the highest 5% of spreads) 

is appropriate for the purposes of 

representing high-end spread costs. 

We considered whether to also 

include ‘‘low-end spread costs’’ but 

determined that the combination of 

presenting ‘‘mid-range spread costs’’ 

and ‘‘high-end spread costs’’ would 

provide the most meaningful disclosure 

to investors. Many ‘‘low-end spread 

costs’’ for ETFs with significant volume 

have a penny spread and would 

therefore not provide as useful of a 

comparison across funds. Furthermore, 

some ‘‘mid-range spread costs’’ and 

‘‘high-end spread costs’’ could account 

for more than 50% of the cost of an 

initial investment in an ETF, whereas a 

‘‘low-end spread cost’’ might only 

account for a small fraction of an 

investor’s overall costs. We request 

comment on this point below. 

An investor could use both the 

median bid-ask spread figure from 

proposed Q&A 4 and the costs 

information in Q&A 5 to better assess 

the overall cost impact of the bid-ask 

spread. Proposed Q&As 1–5 also would 

provide investors with a better 

understanding of the basic terminology 

needed to understand some frequently 

overlooked costs associated with 

investing in ETFs, and then provide the 

data needed to understand how those 

costs materialize for the particular fund 

and how those costs compare to other 

ETFs. 

Q&A 6. Cross-reference to ETF’s 

website and Interactive Calculator 

Requirement. As discussed above, 

proposed rule 6c–11 would require 

daily website disclosure of several 

items, including the NAV per share, 

market price, and premium or discount. 

As the disclosures on an ETF’s website 

would be updated daily, we believe a 

cross-reference in Form N–1A to the 

website disclosures would enable 

investors to receive timely and granular 

information that could assist with 

making an investment decision. 


daltland on DSKBBV9HB2PROD with PROPOSALS4
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37375 

383Proposed amendments to Item 3 of Form N– 

1A would require an ETF to include the following 

statement in its prospectus: ‘‘The ETF’s website at 

[www.[Series-SpecificLandingPage.com]] includes 

recent information on the Fund’s net asset value, 

market price, premiums and discounts, as well as 

an interactive calculator you can use to determine 

how the bid-ask spread would impact your specific 

investment.’’ The Commission explained in a 2000 

release that filers submitting HTML documents on 

EDGAR should take reasonable steps when they 

create the document in order to prevent URLs from 

being converted into hyperlinks. See Rulemaking 

for Edgar System, Securities Act Release No. 33– 

7855 (Apr. 24, 2000). 

384As discussed above, we propose to replace the 

historical premium/discount information in Item 

11(g) with line graph disclosure regarding 

premiums and discounts that would be required by 

proposed rule 6c–11(c)(1)(iv). See supra section 

II.C.6. 

385Proposed Instruction 5(a) to Item 3 of Form N– 

1A. 

386 Id. 

387See Items 3 and 4 of Form N–1A. 

Accordingly, we propose to require a 

statement in Q&A 6 that would refer 

investors to the ETF’s website for more 

information.383 Item 11(g) currently 

requires an ETF to provide a website 

address in its prospectus if the ETF 

omits the historical premium/discount 

information from the prospectus and 

includes this information on its website 

instead. As a result, many ETFs already 

include a website address in their 

prospectus.384

In addition, proposed Instruction 5(e) 

to Item 3 would require an ETF to 

provide an interactive calculator in a 

clear and prominent format on the ETF’s 

website. The purpose of the interactive 

calculator is to provide investors with 

the ability to customize the hypothetical 

calculations in Item 3 to their specific 

investing situation. For example an 

investor with an investment of $2,500 

opposed to $10,000 or wishing to trade 

10 times opposed to the 25 times 

presented in Item 3 could use the 

calculator to find more tailored costrelated information. We are sensitive to 

the fact that creating a web-based 

interactive calculator is not without 

cost, especially for smaller fund 

complexes. We have tried to mitigate 

these costs by limiting the proposed 

investor-input to two data points: 

Investment amount and number of 

trades. We also tried to limit the 

complexity of the tool by proposing to 

require the interactive calculator to use 

the calculations detailed in Instructions 

5(a)—(d) to Item 3 to provide the 

information required by Q&As 3–5, 

which relates to the bid-ask spread. 

c. Exception for ETFs With Limited 

Trading History 

Trading information and related costs 

may not be useful to secondary market 

investors in an ETF that has only a 

limited amount of trading history since 

inception. Therefore, we are proposing 

that an ETF that had its initial listing on 

a national securities exchange after the 

beginning of its most recently 

completed fiscal year would not be 

required to include the ETF’s median 

bid-ask spread or the spread cost 

example in its Item 3 disclosure, nor 

would the ETF be required to provide 

an interactive calculator on its 

website.385 We preliminarily believe 

this information is most useful when 

there is at least one full fiscal year of 

data underlying the metrics. Without a 

minimum amount of trading data to 

calculate this information, the resulting 

calculations could be skewed for any 

number of reasons. For example, it is 

possible that the time of year during 

which the ETF was trading or the fact 

that an ETF was relatively new to the 

market and had not had significant 

marketing to gain interest for shares of 

the ETF resulted in low trading volume 

and higher bid-ask spreads. We propose 

to require a newly launched ETF to 

provide a brief statement to the effect 

that the ETF does not have sufficient 

trading history to report trading 

information and related costs.386 The 

proposed amendment would prohibit a 

new ETF from disclosing data based on 

very short trading histories, which we 

preliminarily believe could be 

misleading. This approach would also 

be consistent with our treatment of 

other disclosure items such as portfolio 

turnover data and annual returns.387

We seek comment on our proposed 

amendments to Item 3: 

• Should we require ETFs and mutual 

funds to include a statement that 

investors may be subject to other costs 

not reflected in the fee table, such as 

brokerage commissions and other fees to 

financial intermediaries? Would this 

disclosure be confusing to individual 

investors, particularly those investing in 

mutual funds? 

• In addition to the statement 

regarding brokerage commissions, 

should we require quantitative 

disclosure of the range of brokerage 

commissions for transactions? Should 

this disclosure be required of both 

mutual funds and ETFs? Where in the 

registration statement should such 

disclosure be included? Or, would 

disclosure of brokerage commissions 

raise challenges too great to require 

disclosure? For example, would 

variations in methods used to collect 

and set commissions make such 

disclosure too complex? How costly or 

difficult would it be to obtain 

information about brokerage 

commissions? 

• Should other costs be disclosed in 

Item 3? If so, which costs and why? 

How and where should those other costs 

be disclosed? Should Item 3 include 

market price range or NAV range? What 

other trading information, if any, should 

be included in Item 3 and why? For 

example, should we require ETFs to 

disclose information regarding the 

number of days the ETF’s shares traded 

on a national securities exchange, the 

ETF’s average daily volume, and/or the 

ETF’s total number of shares 

outstanding? If so, how should we 

require these metrics to be calculated 

and disclosed? 

• Should we include the specific ETF 

disclosures in Item 3? Should we 

require that those disclosures be made 

in a Q&A format? Would investors 

understand and find the proposed Q&A 

format useful? Are there other formats 

we should consider? Should we permit 

ETFs to use any format that is designed 

to effectively convey the information to 

investors? 

• Should we replace the reference to 

‘‘national securities exchange’’ with 

‘‘secondary markets’’ in Q&A 1 as 

proposed? 

• Should we require ETFs to explain 

bid-ask spreads and the factors that 

could affect bid-ask spreads in Item 3? 

Are there other explanations (or means 

to calculate bid-ask spreads) that we 

should consider? Are there other factors 

that could impact bid-ask spreads that 

we should include in this explanation? 

• Should the median bid-ask spread 

information be included in the 

prospectus? Should this information be 

included in Item 3 or in a different 

section of the registration statement? If 

so, where? Alternatively, should we 

require disclosure of this information on 

an ETF’s website? 

• To what extent is historical spread 

data predictive of future spread data? 

Should we require language indicating 

that historical spread data may not be 

predictive of future spread data? 

• Should the spread calculation 

exclude data from the beginning and 

end of the trading day? If so, what time 

periods should it exclude and why? For 

example, should we exclude the first 

and last 15 minutes of each trading day? 

• Should the spread calculation be 

based on data from an ETF’s fiscal-year 

end or calendar-year end and why? 

Would the use of fiscal-year make 

comparability among funds more 

difficult since funds have different 

fiscal-year ends? Should the spread 

calculation be based on data from more 

than one year? If so, how many years 

and why? Should the spread calculation 

be based on data that, in addition to the 

fiscal or calendar year, also includes 


daltland on DSKBBV9HB2PROD with PROPOSALS4
37376 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

388See supra footnote 314. 

389 Instruction 6 to Item 3 of Form N–1A defines 

a ‘‘New Fund’’ as ‘‘a Fund that does not include in 

Form N–1A financial statements reporting operating 

results or that includes financial statements for the 

Fund’s initial fiscal year reporting operating results 

for a period of 6 months or less.’’ The instruction 

permits New Funds to estimate ‘‘Other Expenses’’ 

and to complete only 1- and 3-year portions of the 

expense example. Id. 

390 Item 6(c)(i) of Form N–1A. 

391See Item E.3.a of Form N–CEN; see also 

Reporting Modernization Adopting Release, supra 

footnote 147, at n.1100 and accompanying text 

(requiring ETFs ‘‘to report the number of ETF shares 

required to form a creation unit as of the last 

business day of the reporting period.’’). 

392See proposed amendments to Item 6 of Form 

N–1A. 

393See proposed amendments to Item 3 of Form 

N–1A. 

data from the most recently completed 

fiscal or calendar quarter, respectively? 

Should the calculation be done on a 

daily basis first and then again across 

the entire fiscal year? 

• Should the calculation for the bidask spread throughout the trading day 

be done more or less frequently than 

every ten seconds? If so, how frequently 

and why? 

• Should the bid and ask be 

calculated using a different method, 

such as weighting the prices throughout 

the book? If so, explain the method and 

why it should be used. 

• Should a metric other than median 

be used for the spread calculation? For 

example, should we use average spread 

or effective spread? 388 If so, why is it 

preferable and how should it be 

calculated? Would the use of a different 

spread calculation provide more 

comprehensive information about 

extreme market events? For example, 

should we also require disclosure of 

additional percentiles towards the 

extreme of the distribution, such as the 

95th percentile? 

• Instead of using the bid-ask spread 

as an indicator of trading costs, is there 

another method that would better reflect 

an ETF’s overall trading costs? If so, 

what is that metric, why is it better than 

disclosing the bid-ask spread, and how 

should it be calculated and disclosed? 

• How difficult or costly would it be 

for ETFs to obtain the data necessary to 

calculate median bid-ask spread as 

proposed? Are there any negative 

consequences of disclosing the bid-ask 

spread? If so, what are they? 

• When calculating the spread costs 

example, should the bid-ask spread be 

divided by two for each transaction 

listed or should each transaction reflect 

the full round-trip spread cost? 

• Should we require disclosure of 

costs associated with ‘‘mid-range spread 

costs’’ and ‘‘high-end spread costs’’, as 

proposed? Should we additionally 

include a requirement to disclose ‘‘lowend spread costs’’? Why or why not? 

Would the disclosure of this data result 

in retail investor confusion? 

• Is the $10,000 trade amount used in 

the spread costs example reasonable? 

Should we consider a lower trade 

amount? Alternatively, should the 

spread costs example show varying 

trade sizes calculated using varying 

book depths? If so, what trade sizes and 

why should they be used? 

• Should the spread example include 

a different number of transactions? If so, 

how many transactions should be used 

for each column and why? Should the 

number of transactions vary based on 

the type of investment strategy the ETF 

pursues? If so, how should we 

determine the number of transactions 

and corresponding ETF types? 

• Are there any negative 

consequences of disclosing the spread 

costs example? If so, what are they? 

• Should each ETF be required to 

disclose a website address in Item 3 as 

proposed? Should we permit an ETF to 

comply with this requirement by 

including a general web address to an 

investment company complex’s website 

or should we require a series-specific 

landing page for the ETF? Would a 

cross-reference to the ETF’s seriesspecific page be useful? 

• Should we require ETFs to disclose 

information regarding premiums and 

discounts in Item 3 of Form N–1A, 

either in addition to, or in lieu of, the 

disclosures proposed in rule 6c–11? If 

so, should the information be based on 

data over the entire fiscal year or 

calendar year? Do commenters believe 

that the reference to the ETF’s website, 

where such information may be found, 

provides investors with useful 

information regarding these potential 

costs? 

• Would investors find the 

information in our proposed 

amendments to Item 3 helpful in 

comparing between different investment 

options? 

• Should we require funds, as 

proposed, to provide investors with an 

interactive calculator on their website? 

Would investors find an interactive 

calculator helpful to better understand 

the costs of investing in ETFs? Are there 

data points that we have not discussed 

that the interactive calculator should 

include? Should the interactive 

calculator be required for both mutual 

funds and ETFs? For example, should 

the interactive calculator be expanded 

to include fee table information for both 

ETFs and mutual funds? Are there any 

challenges to posting an interactive 

calculator that we are not considering? 

What costs would be associated with 

developing this type of calculator? 

• Should we require funds to provide 

an interactive calculator on their 

website for other costs, such as any 

costs attributable to premiums or 

discounts? If so, what would be the user 

inputs and outputs for the calculator? 

How would the calculator calculate 

such a cost? 

• Should there be an exception to the 

requirement to disclose trading 

information and related costs for newly 

launched ETFs as proposed? If not, why 

not? Should a newly launched ETF 

nevertheless be required to provide an 

interactive calculator on its website? 

Should the threshold for the exemption 

to include trading information and 

related costs disclosure instead be based 

on Form N–1A’s definition of ‘‘New 

Fund’’ 389 or a different period of time? 

If so, why? Should there be an exception 

to disclosing trading information and 

related costs for any other reason (e.g., 

limited trading book depth, low volume, 

or trading only on a percentage of the 

days throughout the year)? If so, what 

should the threshold be and why? 

• In lieu of providing an exception 

from the requirement to disclose trading 

information and related costs for newly 

launched ETFs, should we instead 

adopt a requirement for ETFs to disclose 

this information once the ETF reaches 

or exceeds a specified threshold of 

trading volume for a specified period of 

time, regardless of how long it has been 

in operation? Put differently, should we 

base this exception on level of trading 

volume rather than the length of an 

ETF’s operation? If so, what should such 

thresholds be? If not, why not? 

3. Item 6 of Form N–1A 

Currently, Item 6(c)(i) of Form N–1A 

requires an ETF to: (i) Specify the 

number of shares it will issue or redeem 

in exchange for the deposit or delivery 

of baskets; (ii) explain that the 

individual shares of the ETF may only 

be purchased and sold on a national 

securities exchange through a broker or 

dealer; and (iii) disclose that the price 

of ETF shares is based on the market 

price and as a result, shares may trade 

at a price greater than NAV (premium) 

or less than NAV (discount).390 The 

number of shares the ETF issues or 

redeems in exchange for the deposit or 

delivery of baskets is largely duplicative 

of reports required in Form N–CEN.391

We therefore propose to remove this 

requirement from Item 6.392 The 

remainder of the information required 

by Item 6(c)(i) is proposed to be moved 

to the Item 3 disclosure.393 In order to 

eliminate duplicative disclosure, we 

propose to remove these requirements 


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394See proposed amendments to Item 6 of Form 

N–1A. 395 Item 6(c)(ii) of Form N–1A. 396See proposed amendments to Item 6 of Form 

N–1A. 397See Enhanced Disclosure and New Prospectus 

Delivery Option for Registered Open-End 

Management Investment Companies, Investment 

Company Act Release No. 28584 (Jan. 13, 2009) [74 

FR 4546 (Jan. 26, 2009)] (‘‘Summary Prospectus 

Adopting Release’’), at nn.170–72. 

398 Item 11(g)(1) of Form N–1A. 

399See supra section I.H.3. 

400Proposed Item 11(g)(1) of Form N–1A. 

401 Item 11(a)(2) of Form N–1A. Item 11(a)(1) 

already requires that ETFs include an explanation 

that the price of fund shares is based on market 

price. Item 11(a)(1) of Form N–1A. 

402 Item 11(b) and (c) of Form N–1A. 

403See proposed rule 6c–11(a). 

404 Item 11(g)(2) of Form N–1A. The item 

provides that an ETF may omit the table if it 

provides a website address that investors can use 

to obtain the premium/discount information 

required by the item. 

405Although the time period required by this 

disclosure is different than the requirement in Item 

11(g)(2), ETFs are permitted to omit both 

disclosures by providing on their websites only the 

premium/discount information required by Item 

11(g)(2) (the most recently completed fiscal year 

and quarters since that year). 

from Item 6.394 As noted above, moving 

this information to Item 3 would 

consolidate relevant disclosures 

regarding the fees and trading costs that 

may be borne by an ETF investor in one 

place. 

Additionally, Item 6(c)(ii) currently 

requires ETFs issuing shares in creation 

units of less than 25,000 to disclose the 

information required by Items 6(a) and 

(b).395 Current Items 6(a) and (b) require 

funds to: (i) Disclose their minimum 

initial or subsequent investment 

requirements; (ii) disclose that the 

shares are redeemable; and (iii) describe 

the procedures for redeeming shares. 

We are proposing to eliminate these 

disclosures.396 When we adopted these 

requirements, we reasoned that 

individual investors may be more likely 

to indirectly transact in creation units 

through authorized participants if the 

creation unit size was less than 25,000 

shares.397 Based on staff experience, we 

understand that retail investors do not 

engage in primary transactions through 

authorized participants. Furthermore, to 

the extent that authorized participants 

act as agents for market makers in 

primary transactions with the ETF, we 

believe that the flow of information on 

how to purchase and redeem shares is 

robust given the market maker’s 

relationship with an authorized 

participant. Therefore, we do not 

believe that this disclosure would be 

beneficial. 

We request comment on the proposed 

amendments to Item 6. 

• Should we remove the disclosure 

regarding creation unit sizes from Form 

N–1A, as proposed? Are we correct in 

our understanding that this disclosure is 

largely duplicative of disclosure 

required in Form N–CEN? Are we 

correct in our belief that investors do 

not find this information useful in the 

context of a prospectus? Instead of 

removing this disclosure from Form 

N–1A entirely, should we move it to the 

Statement of Additional Information? 

Do retail investors typically use the 

information on creation unit size and if 

so, for what purpose? Is our belief 

correct that this information is more 

useful for authorized participants and 

market makers and less useful to 

investors purchasing individual shares 

on an exchange? 

• Alternatively, should we require 

ETFs to disclose information regarding 

their creation unit sizes or transaction 

fees, or both, on their websites? 

• Should ETFs continue to disclose in 

Item 6 (or any other Item included 

within the summary prospectus 

disclosure) information currently 

required by Items 6(a) and (b)? If so, 

why? Should this disclosure be based 

on a numerical threshold, and if so, 

what would the appropriate threshold 

be and why? 

• Should we require ETFs to provide 

disclosure regarding transaction fees 

associated with the purchase and 

redemption of creation units? If so, 

where should such disclosure be 

provided? 

• Are we correct in our 

understanding that that the flow of 

information on how to purchase and 

redeem ETF shares is robust due to the 

relationship between market makers and 

authorized participants? 

4. Item 11 of Form N–1A 

Item 11(g)(1) currently specifies that 

an ETF may omit information required 

by Items 11(a)(2), (b), and (c) if the ETF 

issues or redeems shares in creation 

units of not less than 25,000 shares 

each.398 Similar to the reasoning 

discussed above regarding amendments 

to Item 6,399 we propose to amend Item 

11(g)(1) to permit all ETFs, not just ones 

with creation unit sizes of not less than 

25,000 shares, to omit the information 

required by Items 11(a)(2), (b), and 

(c).400

Item 11(a)(2) requires a fund to 

disclose when calculations of NAV are 

made and that the price at which a 

purchase or redemption is effected is 

based on the next calculation of NAV 

after the order is placed.401 Item 11(b) 

and (c) require a fund to describe the 

procedures used for purchasing and 

redeeming the fund’s shares.402 In our 

view, eliminating these disclosure 

requirements for all ETFs would not 

detract from an understanding of how 

authorized participants transact directly 

with the ETF in the primary market. As 

discussed above, the proposed rule 

would define an authorized participant 

as a member or participant of a clearing 

agency registered with the Commission, 

which has a contractual arrangement 

with the ETF or one of the ETF’s service 

providers.403 Thus, we believe the 

parties who purchase or redeem shares 

from the ETF directly would either have 

the knowledge necessary to do so 

without additional procedural 

disclosure or the ability to request such 

information. 

Item 11(g)(2) currently includes a 

requirement for an ETF to provide a 

table showing the number of days the 

market price of the ETF’s shares was 

greater than the ETF’s NAV per share for 

certain time periods.404 As discussed 

above, we propose to require 

information about the premium and 

discount of the ETF’s shares to their 

NAV per share to be included on the 

ETF’s website. Thus, we are proposing 

to remove the information currently 

required by Item 11(g)(2), as more 

timely information would be available 

on the ETF’s website. For the same 

reasons, we are also proposing to 

eliminate Item 27(b)(7)(iv) of Form N– 

1A, which requires ETFs to include a 

table with premium/discount 

information in their annual reports for 

the five most-recently completed fiscal 

years.405

We request comment on the proposal 

to remove the requirement to disclose 

information required by Items 11(a)(2), 

(b), and (c) as well as the proposal to 

remove the requirement to disclose the 

premium/discount information in the 

prospectus and annual report. 

• Should we keep this disclosure in 

the prospectus? If we were to keep this 

disclosure requirement, should we 

require ETFs to disclose different 

information about the procedures to 

purchase and redeem shares directly 

with the ETF? 

• Do most ETFs provide the 

premium/discount information required 

by this information on their websites? If 

we were to keep the requirement to 

disclose the premium/discount 

information in the prospectus, should it 

mirror the information proposed to be 

required on the ETF’s website? 

5. Potential Alternatives to Current ETF 

Registration Forms 

As discussed above, open-end funds, 

including ETFs organized as open-end 

funds, are required to file Form N–1A to 


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406See infra section II.0. 

407See generally Hu and Morley, supra footnote 

291 (proposing a new ETP disclosure regime that 

‘‘responds to the significance of the arbitrage 

mechanism, model-related complexities and 

evolving understandings and conditions’’). 

408See generally id. 

409 Id.; see also Item 27(b)(7) of Form N–1A. 

410For example, in 2017, the Canadian Securities 

Administrators began requiring ETFs traded on 

Canadian exchanges to provide investors with a 

document, not to exceed four pages in length, called 

‘‘ETF Facts.’’ The ETF Facts document is required 

to include certain information about the ETF, 

including, among other things, information related 

to the ETF’s investments, risks, and performance, as 

well as background information about ETFs 

generally. See Canadian Securities Administrators, 

Mandating a Summary Disclosure Document for 

Exchange-Traded Mutual Funds and Its Delivery— 

CSA Notice of Amendments to National Instrument 

41–101 (Dec. 8, 2016), available at http://

www.osc.gov.on.ca/documents/en/SecuritiesCategory4/ni_20161208_41-101_traded-mutualfunds.pdf. 

411While open-end funds register with the 

Commission with Form N–1A, UITs must register 

with two forms: Form S–6 which is used for 

registering the offering of the UITs’ units under the 

Securities Act, and Form N–8B–2, which is used for 

registration under the Investment Company Act. 

Form S–6, which must be filed with the 

Commission every 16 months, provides certain 

content requirements, mainly by referencing to the 

disclosure requirements in Form N–8B–2. 

412See 2008 ETF Proposing Release, supra 

footnote 3, at section III.D.1. for a general 

discussion of ETF prospectus delivery 

requirements. Since UITs issue securities, and not 

subject to any of the applicable exemptions, both 

sponsors and dealers are required to deliver a 

current prospectus to unit holders. See section 5(b) 

of the Securities Act (requiring prospectus delivery 

with the sale of securities, including units of UITs); 

see also section 24(d) of the Act (eliminating the 

‘‘dealer exception’’ in section 4(3) of the Securities 

Act for transactions in redeemable securities by 

UITs); see also supra footnote 27. 

413Because Form S–6 requires UIT prospectuses 

to include disclosure required by specified 

provisions of Form N–8B–2, the proposed 

disclosure amendments to Form N–8B–2 would 

also apply to prospectuses on Form S–6. 

414See section II.H. 

415The proposed definition of the term 

‘‘exchange-traded fund’’ in Form N–1A covers ETFs 

organized as open-end funds and includes ETFs 

relying on either exemptive orders or rule 6c–11 to 

operate. Form N–8B–2, on the other hand, is for 

UITs, which would not be able to rely on rule 6c– 

11 to operate. Accordingly, the proposed definition 

of ‘‘exchange-traded fund’’ in Form N–8B–2 omits 

the reference to rule 6c–11. 

register under the Act and to offer their 

securities under the Securities Act. 

UITs, including ETFs organized as UITs, 

initially register under the Investment 

Company Act on Form N–8B–2 and 

register their offerings of securities 

under the Securities Act on Form S– 

6.406 However, ETFs, regardless of 

structure, operate differently than the 

other investment companies that 

register on Forms N–1A and N–8B–2. 

For example, unlike traditional openend funds and UITs, ETFs are exchangetraded and investors rely on the 

arbitrage mechanism to ensure that the 

ETF’s shares trade at or close to its 

NAV.407 As a result of these differences, 

in addition to our proposed 

amendments to Form N–1A and Form 

N–8B–2, we are seeking comment on 

whether we should create a new 

registration form that is specifically 

designed for ETFs or consider other 

disclosure formats as part of a future 

rulemaking. 

• Should we create a new registration 

form for ETFs? What types of ETFs 

should be required to file reports on 

such a form? For example, should we 

limit the form to ETFs that would be 

subject to proposed rule 6c-11? Or 

should all ETFs, including UIT ETFs, 

file reports on such a form? 

• What type of ETF-specific 

information should such a form 

include? Should the form require more 

disclosure on the effectiveness of the 

arbitrage mechanism? 408 Should the 

disclosures require qualitative 

disclosures that relate specifically to 

ETFs, including the performance of the 

ETF’s arbitrage mechanism? Should this 

disclosure be required as part of an 

annual report? 409 Should we require a 

discussion of the ETF’s bid-ask spread 

or premiums and discounts throughout 

the year? Should the form include a 

discussion of ETF-specific risk factors? 

If so, what risk factors should be 

included? 

• Should we require ETFs to provide 

investors with a short summary 

document that provides key information 

about the ETF? What type of 

information should the document 

include? For example, should it include 

information related to the ETF’s 

strategy, portfolio investments, costs, 

risks, or performance? Should we 

require it to be in a standardized 

format? 410

• As an alternative to a new ETF 

form, or in addition to such a form, 

should we consider a summary 

prospectus targeted specifically at ETFs 

and their unique features? 

• Should we require ETFs to file 

periodic reports, such as on Form 8–K? 

Under what circumstances should we 

require periodic reports? For example, 

should we require ETFs to file periodic 

reports after a market event that 

adversely affects the arbitrage 

mechanism during the trading day? 

I. Amendments to Form N–8B–2 

Form N–8B–2 is the registration form 

under the Investment Company Act for 

UITs which are currently issuing 

securities and is used for registration of 

ETFs organized as UITs.411 For the 

reasons discussed above in section 

II.A.1, we believe that UIT ETFs should 

be regulated pursuant to their exemptive 

orders, rather than a rule of general 

applicability and are not proposing to 

include them within the scope of 

proposed rule 6c–11. However, we 

believe that it is important for investors 

to receive consistent disclosures for ETF 

investments, regardless of the ETF’s 

form of organization.412 We are 

therefore proposing to amend Form N– 

8B–2 413 to require UIT ETFs to provide 

disclosures that mirror certain of our 

proposed disclosure changes in Form 

N–1A.414 Below are the proposed Form 

N–8B–2 amendments and the 

corresponding sections in Form N–1A. 

Disclosure topic Proposed Form N–1A 

ETF disclosure 

Corresponding 

Form N–8B–2 

proposed disclosure 

Definitions for Exchange-Traded Fund .................... General Instructions Part A ..................................... General Instructions Definitions.415

Information Concerning Fees and Costs ................. Item 3. Risk/Return Summary: Fee Table .............. Item I.13(h). 

Information Concerning Fees and Costs ................. Item 3. Exchange-Traded Fund Trading Information and Related Costs.Item I.13(i). 

UIT ETFs, like other ETFs, are 

exchange-traded. As a result, secondary 

market investors in UIT ETFs, like other 

ETFs, are subject to costs, such as: bidask spreads; brokerage commissions for 

buying and selling shares of a UIT ETF 

through a broker-dealer; and potential 

costs related to purchasing UIT ETF 

shares at a premium or discount to NAV 

per share. As with investors in ETFs 

organized as open-end funds, we believe 

that unit holders could overlook these 

costs for UIT ETFs. We believe that 

additional disclosure would help 

investors better understand the total 

costs of investing in a UIT ETF. 

Accordingly, we are proposing 

disclosure requirements in Form N–8B– 


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416See proposed Items 13(h) and (i) of Form N– 

8B–2. See also supra section II.H.2 describing the 

ETF trading information and related costs 

disclosure requirements. 

417UIT ETFs also would be required to provide 

certain ETF specific information in reports on Form 

N–CEN. See Part E of Form N–CEN. Additionally, 

a UIT ETF would be required to provide certain 

information relating to the index that it tracks, 

including the return difference and whether the 

index is constructed by an affiliated person or is 

exclusive to the UIT. See Item E.4 of Form N–CEN. 

418See Reporting Modernization Adopting 

Release, supra footnote 147. 

419 Item C.7. of Form N–CEN. 

420Proposed Item C.7.k. of Form N–CEN. 

421See Item C.3.a.i. of Form N–CEN. 

422See proposed amendment to Instruction to 

Item E.2 of Form N–CEN. 

423As discussed in more detail below, some 

conditions in the proposed rule and the scope of the 

relief provided are less flexible than those included 

in certain exemptive orders (e.g., the absence in the 

proposed rule of master-feeder relief) and others 

represent requirements that were not included in 

exemptive orders (e.g., basket policies and 

procedures and the recordkeeping requirements). 

2 that mirror those of Item 3 of Form N– 

1A, thus requiring prospectuses on 

Form S–6 for UIT ETFs to disclose that 

an ETF investor may pay additional 

fees, such as brokerage commissions 

and other fees to financial 

intermediaries, and to provide certain 

ETF trading information and related 

costs.416

As discussed above, the proposed 

instructions to Item 3 would require 

median bid-ask spread to be disclosed 

on an ETF’s website. UIT ETFs would 

be subject to this requirement as well. 

We note in this regard that UIT ETFs 

currently are not subject to website 

disclosure requirements regarding 

trading costs or other information. 

However, as a matter of practice, UIT 

ETFs generally disclose information 

regarding market price, NAV per share, 

premium and discounts, and spreads on 

their websites today.417

We request comment on the proposed 

amendments to Form N–8B–2. 

• Should we require ETFs organized 

as UITs to provide disclosures that are 

consistent with Form N–1A in the 

manner proposed? 

• Do the proposed amendments to 

Form N–8B–2 ensure consistency 

between ETFs organized as open-end 

funds and UIT ETFs? Why or why not? 

• Are there additional amendments to 

Form N–8B–2 the Commission should 

consider? Are there any amendments to 

Form S–6 that the Commission should 

consider? For example, should we 

consider requiring UIT ETFs to provide 

disclosure regarding market price, NAV 

per share, and premiums and discounts? 

Should we consider requiring UIT ETFs 

to provide graphic disclosure regarding 

the ETF’s historical premiums and 

discounts? Should we permit UIT ETFs 

to omit such premium/discount in their 

registration statement if they include 

those disclosures on the ETF’s website? 

• Would the proposed trading cost 

requirements in Form N–8B–2 Items 

I.13(h)–(i) result in UIT ETFs having to 

disclose information not currently 

disclosed on their websites? If so, what 

information would be disclosed that is 

not currently disclosed? 

J. Amendments to Form N–CEN 

Form N–CEN is a structured form that 

requires registered funds to provide 

census-type information to the 

Commission on an annual basis.418 Item 

C.7. of Form N–CEN requires 

management companies to report 

whether they relied on certain rules 

under the Investment Company Act 

during the reporting period.419

We are proposing to add to Form N– 

CEN a requirement that ETFs report if 

they are relying on rule 6c–11.420 While 

Form N–CEN already requires funds to 

report if they are an ETF,421 we are 

proposing to collect specific information 

on which funds are relying on rule 6c– 

11 in order to better monitor reliance on 

rule 6c–11 and to assist us with our 

accounting, auditing and oversight 

functions, including compliance with 

the Paperwork Reduction Act. 

As discussed above in section II.C.1, 

we are also changing the definition of 

‘‘authorized participant’’ in Form N– 

CEN to exclude the specific reference to 

an authorized participant’s participation 

in DTC in order to obviate the need for 

future amendments if additional 

clearing agencies become registered 

with the Commission. Revised Form N– 

CEN would define the term as ‘‘a 

member or participant of a clearing 

agency registered with the Commission, 

which has a written agreement with the 

Exchange-Traded Fund or ExchangeTraded Managed Fund or one of its 

service providers that allows the 

authorized participant to place orders 

for the purchase and redemption of 

creation units.’’ 422

We request comment on our proposed 

amendments to Form N–CEN. 

• Should we require any additional 

information concerning proposed rule 

6c-11? If so, what information and 

where? For example, should we require 

ETFs to provide information to the 

Commission on a monthly basis on 

Form N–PORT? If so, what information? 

• Should we amend the definition of 

‘‘authorized participant’’ in Form N– 

CEN as proposed or should we retain its 

existing definition? 

III. Economic Analysis 

A. Introduction 

ETF sponsors seeking to operate an 

ETF currently need to obtain an order 

from the Commission that exempts them 

from certain provisions of the Act that 

otherwise would prohibit several 

features essential to the ETF structure. 

Obtaining such exemptive relief 

typically has resulted in expenses and 

delays in forming new ETFs. In 

addition, the conditions in the 

exemptive orders issued by the 

Commission have evolved over time. As 

a result, some ETF sponsors may have 

a competitive advantage over other 

sponsors because some existing 

exemptive orders allow the sponsors to 

launch new funds under the terms and 

conditions of those orders, and because 

the terms in some of the existing 

exemptive orders may be more flexible 

than others. 

Proposed rule 6c–11 would allow 

ETFs that satisfy certain conditions to 

operate without obtaining an exemptive 

order from the Commission. As 

discussed above, the Commission also 

proposes to rescind the exemptive relief 

we have issued to ETFs that could rely 

on the proposed rule. However, we 

anticipate that ETFs whose exemptive 

relief would be rescinded under the 

proposed rule generally would be able 

to rely on the proposed rule without 

substantially changing their current 

operations, as the conditions for relying 

on the proposed rule would be similar 

to those contained in existing exemptive 

relief, consistent with existing market 

practice, or generally more flexible than 

those contained within existing 

exemptive relief.423 ETFs that wish to 

operate in a manner not covered by the 

proposed exemptive rule could seek 

individual exemptive relief from the 

Commission. 

We believe that proposed rule 6c–11 

would establish a regulatory framework 

that: (1) Reduces the expense and delay 

currently associated with forming and 

operating certain ETFs unable to rely on 

existing orders; and (2) creates a level 

playing field for ETFs that could rely on 

the proposed rule. As such, the 

proposed rule would enable increased 

product competition among certain ETF 

providers, which could lead to lower 

fees for investors, encourage financial 

innovation, and increase investor choice 

in the ETF market. 

Furthermore, the amendments to 

Forms N–1A and N–8B–2 as well as the 

additional website disclosures required 

by the proposed rule are intended to 

improve the information about ETFs 

available to the market and to allow 


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37380 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

424For the purpose of this release, we focus 

exclusively on ETFs that trade on US exchanges. 

425The number and net assets of ETFs are based 

on a staff analysis of Bloomberg data. Growth rates 

for open- and closed-end funds are based on a staff 

analysis of Morningstar data. 

investors to more readily obtain 

information about fund products, 

resulting in reduced investor search 

costs. To the extent that the proposed 

amendments would improve investors’ 

ability to evaluate the performance and 

other characteristics of fund products, 

the proposed amendments might result 

in better informed investor decisions 

and more efficient allocation of investor 

capital among fund products, and might 

further promote competition among 

ETFs and between ETFs and mutual 

funds. 

The proposed rule and amendments 

to Forms N–1A and N–8B–2 also may 

impact non-ETF products and market 

participants. To the extent that the 

proposed rule would lead to lower 

investor search costs, lower fees, and 

increased product innovation and 

investor choice in the ETF market, 

investors may shift their investments 

towards ETFs and away from funds 

similar to ETFs, such as mutual funds. 

Such a shift in investor demand also 

may affect broker-dealers and 

investment advisers, whose customers 

and clients may show increased interest 

in and demand for ETFs. Moreover, 

because ETF shares are traded on the 

secondary market, the proposed rule 

also could affect exchanges, alternative 

trading systems, facilities for OTC 

trading, broker-dealers, and clearing 

agencies to the extent that the rule 

causes changes in the ETF trading 

activity they support. 

B. Economic Baseline 

1. ETF Industry Growth and Trends 

The ETF industry has experienced 

extensive growth since the first US ETF 

began trading in 1993.424 From 1993 to 

2002, an average of 10 new ETFs 

registered each year and ETF net assets 

increased by an average of $10.7 billion 

annually. Industry growth accelerated 

from 2003 to 2006, when, on average, 62 

new ETFs and $77 billion in net assets 

were added to the industry annually. 

Since 2007, the industry has seen an 

average of 141 new ETF entrants and an 

average growth of $272.8 billion 

annually. Since 2007, ETF net assets 

have grown at an average rate of 18.4% 

per year, which compares to 4.2% for 

closed-end funds and 9.7% for openend funds over the same period.425

At the end of December 2017, there 

were 1,900 registered ETFs that had a 

total of $3.4 trillion in net assets, 

spanning six broad investment style 

categories. ETFs are predominantly 

structured as open-end funds; however, 

eight funds that together represented 

10.9% of ETF total net assets ($372.8 

billion) were structured as UITs, and 70 

ETFs that together represented 25.1% of 

total net assets ($854.9 billion) were 

structured as a share class of an openend fund. The chart illustrates growth in 

ETF net assets by investment strategy 

beginning in 2000 (left-hand side axis). 

It also tracks the percentage of net assets 

invested in actively managed ETFs 

(right-hand side axis). 


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426As of the end of December 2017, 1,635 ETFs 

were neither organized as a UIT, nor as a share class 

of an open-end fund, and do not pursue leveraged 

or inverse investment strategies. During 2017, the 

number of such funds grew by 124. (In the last five 

years, the increase in such funds ranged from 90 in 

2013 to 181 in 2015.) 

427Bloomberg defines actively managed or indexbased managed funds according to disclosure in the 

fund prospectus. 

428We estimate funds’ foreign holdings on April 

11, 2018 from Morningstar data. For each ETF, 

foreign holdings of equity and debt securities are 

combined to obtain the approximate percentage of 

assets invested in foreign securities. Morningstar 

provided foreign holding data for 1,724 ETFs. In 

this data, 268 funds, one of which is structured as 

a UIT, reported holding no foreign securities and 

176 funds from the original 1,900 are missing 

foreign holdings data. 

Although indexing is still the most 

common ETF strategy, over time ETFs 

have evolved to offer, among other 

things, active management, leveraged 

and inverse investment strategies, and 

exposure to various types of foreign 

securities. At the end of December 2017, 

187 ETFs, structured as open-end funds, 

employed leveraged or inverse 

investment strategies.426 In total, 

leveraged ETFs had total net assets of 

$35.26 billion or approximately 1% of 

all ETF net assets. None of the eight 

registered ETFs structured as UITs 

employed leveraged or inverse 

investment strategies. Of the remaining 

unleveraged ETFs, both index-based and 

active, 1,705 funds had combined net 

assets of $3 trillion operated as openend funds, while eight funds had $372.8 

billion in net assets operated as UITs.427

There were 206 actively managed 

ETFs with total net assets of $45.8 

billion. The remaining 1,694 funds with 

combined $3.36 trillion in net assets 

were index-based funds. Of these, 1,686 

with total net assets of $2.987 trillion 

were structured as open-end funds and 

eight with total net assets of $372.8 

billion were structured as UITs. 

The majority of ETFs, in total 1,456, 

held some foreign exposure in their 

portfolio according to Morningstar data. 

These ETFs had total net assets of 

$2.976 trillion. Of these funds, seven 

were structured as UITs and had $350.4 

billion in net assets. The remaining 

1,449 funds and $2.63 trillion in net 

assets were organized as open-end 

funds. On average, these ETFs reported 

foreign exposure of 37.75%. This 

number was 57.13% for ETFs structured 

as UITs and 37.66% for ETFs structured 

as open-end funds.428

2. Exemptive Order Process 

As discussed above, ETFs seeking to 

operate as investment companies 

historically have needed exemptive 

relief from the Commission. Since the 

first exemptive relief was granted in 

1992, the Commission has issued 

approximately 300 exemptive orders to 


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429The earliest order in our sample was approved 

on 1/17/2007 and the latest order was approved on 

4/10/2018. 

430Some market makers and other market 

participants engage in creation and redemptions 

indirectly through authorized participants. See 

supra section I.B. The Commission, however, lacks 

data on the number of such market participants. 

431See Antoniewicz, supra footnote 30. While we 

currently lack data on authorized participants, we 

note that, starting July 30, 2018, Form N–CEN Item 

E.2 will require a fund to provide certain 

information regarding its authorized participants, 

including the authorized participant’s name, the 

SEC file number, CRD number, and other 

information. See Reporting Modernization 

Adopting Release, supra footnote 147. This Item, 

however, will not provide data about other market 

participants that may transact through authorized 

participants. 

432NSCC is the sole provider of clearing services 

for ETF primary market transactions. Whether a 

creation or redemption order is eligible to be 

processed through NSCC depends on the eligibility 

for NSCC processing of the securities in the ETF’s 

basket. See Antoniewicz, supra footnote 30. 

433 In the first quarter of 2018, 68% of ETF trading 

by dollar volume was executed on exchanges, 23% 

over the counter, and 10% using alternative trading 

systems (ATSs), based on Trade and Quote (TAQ) 

data provided by the New York Stock Exchange, 

Trade Reporting Facility (TRF) data provided by 

FINRA, and ATS information made publicly 

available on the FINRA website. 

434The data we use is from Form 13F filings, 

which does not capture all institutional positions 

because Form 13F does not require reporting of 

short positions (which would lead to an 

overstatement of institutional ownership) and 

because not all institutional investors are required 

to file the form, for example because they exercise 

investment discretion in less than $100 million in 

Section 13(f) securities (which would lead to an 

understatement of institutional ownership). 

ETFs. The average number of approved 

exemptive orders between 1992 and 

2006 was approximately 2.5 per year, 

which has increased to approximately 

25 per year since 2007. 

Based on our review of exemptive 

orders that granted relief for 

unleveraged ETFs between January 2007 

and mid-March 2018, the median 

processing time from the filing of an 

initial application to the issuance of an 

order was 221 days, although there was 

considerable variation.429 Depending on 

the complexity of a fund’s application, 

some ETF sponsors received exemptive 

relief in a relatively short period of time 

(the 10th percentile of the processing 

time was 83 days) while others waited 

over one year for approval (the 90th 

percentile of the processing time was 

686 days). 

In addition to the processing time 

associated with applying for an 

exemptive order, Commission staff 

estimates that the direct cost of a typical 

fund’s application for ETF relief 

(associated with, for example, legal fees) 

is approximately $100,000, which may 

vary considerably depending on the 

complexity of the prospective fund. 

3. Market Participants 

As discussed above, several non-ETF 

market participants may be affected by 

the proposed rule, including fund 

sponsors, authorized participants, 

trading venues, and institutional and 

retail investors. 

Using data from Bloomberg, we find 

that there are 83 unique ETF sponsors 

with approximately 1,900 ETFs as of 

December 31, 2017. The median number 

of ETFs per sponsor is eight and the 

mean is 23, suggesting that a small 

number of sponsors have a large share 

of the ETF market (in terms of number 

of ETFs). Indeed, the top five sponsors 

operate a combined 898 ETFs, whereas 

the bottom half of sponsors operate only 

a combined 121 ETFs. 

An ETF (or one of its service 

providers) has contractual arrangements 

with a set of authorized participants, 

who can place orders for the purchase 

or redemption of creation units with the 

ETF.430 While we currently lack data on 

authorized participants, a 2015 surveybased study of fifteen fund sponsors, 

which together offer two-thirds of all 

existing ETFs (covering 90% of all ETF 

assets), finds that the average ETF has 

34 authorized participant agreements.431

The study further reports that creation 

and redemption transactions occurred 

only on between 10% to 20% of trading 

days and that only 10% of the daily 

activity in all ETF shares (by volume) 

are creations or redemptions.432

ETF shares are mainly traded on 

securities exchanges.433 Table 1 lists the 

10 exchanges with the largest average 

daily ETF trading volume, measured 

over the 30 business days ending on 

February 12, 2018. The data is from 

Bloomberg and shows that NYSE Arca 

handles the largest portion of ETF trades 

($23.8 billion), followed by Nasdaq 

InterMarket ($12.8 billion), and Cboe 

BZX Exchange ($11.0 billion). 

TABLE 1—ETFS LISTED ON NATIONAL EXCHANGES AND THEIR TRADING VOLUME

Exchange Number of 

ETFs 

Trading 

volume 

(billion) 

NYSE Arca ................................................................................................................................................................................................ 1,899 $23.8 

NASDAQ InterMarket ................................................................................................................................................................................ 1,537 12.2 

Cboe BZX Exchange, Inc ......................................................................................................................................................................... 1,840 11.0 

Cboe EDGX Exchange, Inc ...................................................................................................................................................................... 1,864 7.4 

Cboe BYX Exchange, Inc ......................................................................................................................................................................... 1,816 4.5 

NASDAQ Global Market ........................................................................................................................................................................... 339 3.2 

Nasdaq BX, Inc ......................................................................................................................................................................................... 1,801 2.7 

Chicago Stock Exchange, Inc ................................................................................................................................................................... 169 2.5 

Cboe EDGA Exchange, Inc ...................................................................................................................................................................... 1,781 2.4 

NASDAQ OMX PSX ................................................................................................................................................................................. 1,343 2.2 

The table reports the number of ETFs traded at each exchange and the average daily ETF trading volume, measured over the 30 business days ending on February 12, 2018. Trading volume is calculated as trade price multiplied by the number of shares relating to each price by exchange. The figures reflect an analysis by 

the Commission staff using data obtained through a subscription to Bloomberg. 

Both institutional and retail investors 

participate in the ETF secondary 

market. Using combined data from 

WRDS SEC Analytics Suite, 

Morningstar, and the Center for 

Research in Security Prices (CRSP) from 

the first quarter of 2014 to the fourth 

quarter of 2016, we estimate that 

institutions own, on average, 43% of 

ETF shares, when calculating the 

average using equal weights for all 

ETFs, and 55%, when calculating the 

average using total net assets (‘‘TNA’’)- 

based weights. The difference between 

the equal-weighted and TNA-weighted 

average institutional ownership 

numbers—43% vs. 55%—suggests that 

institutional investors tend to hold 

larger shares of ETFs with larger TNA. 

The table also shows that the median 

ownership by institutional investors is 

40%. Additionally, the table shows that 

there is considerable variation in 

institutional investor holdings, ranging 

from an average for the 5th percentile of 

6% to an average for the 95th percentile 

of 90%.434 However, we observe that the 

average institutional holding did not 

change considerably over time during 

the sample period. 


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435Morningstar category is assigned based on the 

underlying securities in each portfolio. Per 

Morningstar, funds in allocation categories seek to 

provide both income and capital appreciation by 

investing in multiple asset classes, including stocks, 

bonds, and cash. Funds in alternative strategies 

employ investment approaches (similar to those 

used by hedge funds) designed to offer returns 

different than those of the long-only investments in 

the stock, bond, or commodity markets. 

International equity portfolios expand their focus to 

include stocks domiciled in diverse countries 

outside the United States though most invest 

primarily in developed markets. Municipal bond 

strategies are generally defined by state or national 

focus and duration exposure. A fund is considered 

state-specific if at least 70% of its assets are 

invested in municipal securities issued by the 

various government entities of a single state. Sectorspecific equity funds are usually equity funds, in 

that they maintain at least 85% exposure to equity. 

Fixed Income Taxable bond portfolios invest at 

least 80% of assets in securities that provide bond 

or cash exposure. U.S. equity portfolios are defined 

as maintaining at least 85% exposure to equity and 

investing at least 70% of assets in U.S.-domiciled 

securities. 

436 It is possible for both the ETF’s NAV per share 

and its share price to deviate from the intrinsic 

value of the ETF’s underlying portfolio. In addition, 

there may be cases in which the ETF’s share price 

is closer to the intrinsic value of the ETF’s portfolio 

than its NAV per share. See, e.g., Madhavan, 

Ananth, & Aleksander Sobczyk, Price Discovery and 

Liquidity of Exchange-Traded Funds, 14 Journal of 

Investment Management 2 (2016). 

TABLE 2—INSTITUTIONAL OWNERSHIP OF ETFS

Quarter 

Equalweighted 

average 

(%) 

TNAweighted 

average 

(%) 

SD 

(%) 

P5 

(%) 

P25 

(%) 

P50 

(%) 

P75 

(%) 

P95 

(%) 

2014Q1 ...................................................................................... 40 53 24 6 22 37 56 86 

2014Q2 ...................................................................................... 42 54 25 7 22 37 58 90 

2014Q3 ...................................................................................... 41 55 24 7 23 38 59 88 

2014Q4 ...................................................................................... 43 55 24 6 24 40 60 88 

2015Q1 ...................................................................................... 41 54 24 5 22 38 58 85 

2015Q2 ...................................................................................... 42 55 25 6 23 40 60 91 

2015Q3 ...................................................................................... 44 56 26 7 25 41 62 94 

2015Q4 ...................................................................................... 44 57 26 5 24 43 62 92 

2016Q1 ...................................................................................... 44 57 26 5 24 42 62 92 

2016Q2 ...................................................................................... 43 56 26 6 23 41 61 92 

2016Q3 ...................................................................................... 43 56 26 5 24 41 62 91 

2016Q4 ...................................................................................... 44 57 25 6 24 42 61 91 

Average ..................................................................................... 43 55 25 6 23 40 60 90 

The table reports the quarterly institutional ownership ratio of ETFs, measured as the total number of shares owned by institutional investors divided by the total 

shares outstanding adjusted for share splits. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. All descriptive stats are equalweighted except TNA-Weighted Average. The figures reflect an analysis by the Commission staff using data from 2014Q1 to 2016Q4 obtained through a subscription 

to WRDS SEC Analytics Suite and the Center for Research in Security Prices (CRSP). 

Further analysis shows that the 

ownership structure varies considerably 

by the type of ETF. Using Morningstar 

categories, for the fourth quarter of 

2016, Table 3 below shows that ETFs’ 

equal-weighted average institutional 

ownership ranges from 23% for 

alternative ETFs to 56% for taxable 

bond ETFs. We also find that TNAweighted average institutional 

ownership is higher than equalweighted average institutional 

ownership for international equity, 

municipal bond, sector equity, taxable 

bond, and U.S. ETFs, suggesting that 

institutional investors tend to hold ETFs 

with larger TNA within these categories. 

The converse is true for allocation, 

alternative and commodity ETFs. The 

table also shows that there is large 

variation within categories.435

TABLE 3—INSTITUTIONAL OWNERSHIP OF ETFS BY MORNINGSTAR CATEGORY FOR 2016: Q4 

Quarter 

Equal 

weighted 

average 

(%) 

TNA 

weighted 

average 

(%) 

SD 

(%) 

P5 

(%) 

P25 

(%) 

P50 

(%) 

P75 

(%) 

P95 

(%) 

Allocation ................................................................................... 43 38 26 8 23 36 58 95 

Alternative ................................................................................. 23 16 22 2 6 17 33 68 

Commodities ............................................................................. 41 38 20 10 29 39 59 71 

International Equity ................................................................... 48 63 23 12 31 46 64 91 

Municipal Bond .......................................................................... 48 55 16 15 39 50 59 74 

Sector Equity ............................................................................. 42 57 22 10 26 40 58 83 

Taxable Bond ............................................................................ 56 63 21 20 41 57 72 91 

U.S. Equity ................................................................................ 45 60 23 11 29 43 59 93 

The table reports the institutional ownership ratio of ETFs, measured as the total number of shares owned by institutional investors divided by the total shares outstanding adjusted for share splits, by Morningstar Category. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. All descriptive 

stats are equal-weighted except TNA-Weighted Average. The figures reflect an analysis by the Commission staff using data for 2016Q4 obtained a through subscription to WRDS SEC Analytics Suite and the Center for Research in Security Prices (CRSP). 

4. Secondary Market Trading, Arbitrage, 

and ETF Liquidity 

Unlike shares of open-end funds, ETF 

shares are traded in the secondary 

market at prices that may deviate from 

the ETF’s NAV. As a result, ETF 

investors may trade shares at prices that 

do not necessarily reflect the intrinsic 

value of the underlying ETF assets.436

To reduce the frequency and size of ETF 

premiums and discounts, our exemptive 

orders have contained several 

conditions designed to facilitate an 

efficient arbitrage mechanism, help 

ensure the proper functioning of the 

ETF market, and ultimately protect 

investors. 

One set of conditions has required 

that ETFs be listed on a national stock 

exchange and that exchanges publish 

the fund’s IIV every 15 seconds for 

domestic ETFs and every 60 seconds for 

international ETFs. Another condition, 

which was designed to support the 

effective functioning of the arbitrage 

mechanism, is portfolio transparency. 

All ETFs in operation today have a 

provision in their exemptive order that 

requires them to provide some degree of 

transparency regarding their portfolio 


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437The samples were randomly drawn from all 

index-based ETFs and all actively managed ETFs 

currently trading according to Bloomberg. We 

recognize that the selection of ETFs examined by 

Staff overweights the sample of actively managed 

ETFs relative to the entire population of actively 

managed ETFs. Our sampling procedure was done 

to avoid small sample bias as equally proportioned 

sampling would call for a survey of approximately 

2 actively managed funds. 

438A more flexible basket composition may create 

potential risks such as dumping and cherry-picking, 

as discussed in more detail below. 

439Our exemptive orders have generally included 

future funds relief to allow sponsors to form and 

operate new ETFs without having to obtain 

additional exemptive orders. See supra footnote 5. 

As a result, the Commission does not have records 

that would allow us to determine the specific 

exemptive order under which any particular fund 

is operating. We thus do not quantify the number 

of funds operating under each of the different 

basket flexibility conditions included in our orders. 

440 In addition, some funds disclose some 

historical information on premiums and discounts 

on their website pursuant to the flexibility provided 

on Form N–1A. See supra section II.C.6.c. 

441See supra footnote 437. 

442Commenters to our 2015 ETP Request for 

Comment, supra footnote 9, report qualitatively 

similar results. See, e.g., Comment Letter of Eaton 

Vance Corp. to Request for Comment on ExchangeTraded Products (File No. S7–11–15) (Aug. 17, 

2015). 

holdings. As discussed above, actively 

managed ETFs and some ETFs that track 

an index from an affiliated index 

provider have been required to disclose 

their holdings prior to the 

commencement of trading each business 

day (i.e., full portfolio transparency). 

Other index-based ETFs are permitted to 

disclose their portfolio holdings 

indirectly, by specifying which index 

they seek to track, as long as the index 

provider lists the constituent securities 

on its website (i.e., index transparency) 

or by disclosing the components of their 

baskets. Based on a staff review of 100 

index-based ETFs, randomly selected 

from all index-based ETFs, and 50 

actively-managed ETFs, randomly 

selected from all actively-managed 

ETFs, all 150 ETFs maintain a website 

and provide the ETF’s complete daily 

portfolio holdings. Therefore, we 

believe that all index-based and 

actively-managed ETFs that could rely 

on the proposed rule now, including 

those that are not subject to a full 

transparency condition in their 

exemptive order, currently provide full 

portfolio transparency.437

The degree to which ETFs have 

flexibility in choosing the composition 

of creation and redemption baskets 

plays an important role for the effective 

functioning of the arbitrage mechanism. 

A more flexible basket composition 

may, among other considerations 

discussed in more detail below, allow 

authorized participants to exchange 

baskets for ETF shares at a lower cost, 

thus increasing arbitrage activity and 

efficient functioning of markets.438 The 

extent to which our exemptive orders 

have allowed ETFs to use creation and 

redemption baskets that deviate from a 

pro rata representation of the ETF’s 

portfolio holdings (i.e., basket 

flexibility) has evolved over time. ETFs 

that received their exemptive orders in 

the early period from 1992–1995 were 

mostly structured as UITs and, as a 

result, the creation and redemption 

baskets were mostly a strict pro rata 

representation of the index, plus some 

cash balancing amount. From 1996 to 

2006, exemptive orders for ETFs, which 

then were mostly structured as openend funds, did not expressly limit 

baskets to a pro rata representation of 

the ETF’s portfolio holdings. From 2006 

to 2010, the Commission limited basket 

flexibility in exemptive orders for ETFs 

organized as open-end funds by 

requiring baskets to generally represent 

a pro rata slice of the fund’s portfolio 

holdings and including conditions 

limiting the circumstances under which 

substitutions would be permitted. 

Starting around 2011, the exemptive 

orders required baskets to be a strict pro 

rata slice of the portfolio holdings and, 

in addition, to be the same for all 

authorized participants, with minor 

exceptions.439

For ETFs that hold foreign 

investments in their portfolio, the 

redemption process for these securities 

may take more than the seven days 

specified under section 22(e) of the Act. 

The Commission has granted exemptive 

relief to certain ETFs who hold foreign 

investments, in many instances up to 15 

days, to satisfy redemption of a foreign 

investment. 

Many exemptive orders have required 

ETFs to disclose on their website, free 

of charge, the previous day’s NAV and 

the price of the ETF shares, as well as 

the premium or discount associated 

with the ETF’s share price at the market 

close.440 Based on a staff review of the 

websites of 150 randomly selected ETFs, 

all of which provided the previous day’s 

NAV, price of the ETF shares (one active 

ETF provided a price based on the 

midpoint between the bid and ask 

prices while the remainder of the active 

and all index-based ETFs provided 

closing prices), as well as the premium 

or discount associated with the ETF 

share price at the market close, we 

believe that all ETFs that could rely on 

the proposed rule currently disclose this 

information on their website.441

ETFs have also been required to have 

contractual agreements with authorized 

participants to purchase or redeem ETF 

shares in creation unit aggregations in 

exchange for a basket of securities and 

other assets. Having an accurate 

estimate of the current ETF share value 

and an opportunity to efficiently create 

or redeem ETF shares in creation unit 

sizes allows authorized participants to 

engage in arbitrage activity that brings 

the market price of ETF shares and the 

value of the ETF’s portfolio closer 

together. As noted earlier, market 

participants can also engage in arbitrage 

activity in the secondary market by 

taking a long and short position on the 

ETF shares and the underlying basket 

assets. For example, if the ETF is trading 

at a premium relative to the NAV per 

share of the ETF’s portfolio, a market 

participant can short the ETF and buy 

the underlying basket assets in 

proportion to the ETF shares. 

Alternatively, if the ETF is trading at a 

discount relative to NAV per share, a 

market participant may buy the ETF and 

short the underlying basket assets in 

proportion to the ETF shares. Then the 

market participant could realize a profit 

by closing the position when the gap 

between the ETF’s share price and NAV 

per share gets closer to zero. This 

trading activity could help close the gap 

even further. 

However, authorized participants, 

other market participants, and 

arbitrageurs acting in secondary markets 

may incur costs and be exposed to risk 

when engaging in arbitrage. The costs 

include bid-ask spreads and transaction 

fees associated with the arbitrage trades. 

In addition, during the time it takes 

arbitrageurs to execute these trades, they 

are exposed to the risk that the prices of 

the basket assets and the ETF shares 

change. As a consequence, arbitrageurs 

may decide to wait for any mispricing 

between the market price of ETF shares 

and NAV per share to widen until the 

expected profit from arbitrage is large 

enough to compensate for any 

additional costs and risks associated 

with engaging in the transaction. 

Using data from Bloomberg, we find 

that ETFs, on average, trade at a price 

slightly higher than the NAV per share 

(i.e., at a premium), as shown in Table 

4 below. The equal-weighted and TNAweighted average premium/discount 

over the last 15 years for all ETFs in the 

dataset are, respectively, 0.074% and 

0.065%, and the median is 0.024%, 

indicating that the prices of ETF shares 

are, on average, higher than the NAV 

per share. One study finds similar 

results and concludes that, on average, 

ETF market prices tend to reflect NAV 

per share closely. However, consistent 

with the study, we find that ETF 

premiums/discounts vary 

significantly.442 For example, we find 


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443See Engle Article, supra footnote 95. 444See, e.g., CFA Guide, supra footnote 370. 445This analysis starts in 2012 because the 

available data begins in that year. 

that the average premiums/discounts 

ranges from 0.03% in 2003 to 0.14% in 

2009, and the average standard 

deviation of premiums/discounts ranges 

from 0.16% in 2017 to 0.60% in 2008. 

Moreover, not all ETF shares trade at a 

premium. For example, the table shows, 

in a given year, at least 25% of ETF 

shares trade at a discount, at an average 

discount of ¥0.044% between all years 

(see the column P25). 

TABLE 4—TIME-SERIES AVERAGES OF CROSS-SECTIONAL DESCRIPTIVE STATISTICS OF PREMIUM/DISCOUNT (%) USING

DAILY DATA

Year 

Equal 

weighted 

average 

TNA 

weighted 

average 

SD P5 P25 P50 P75 P95 

2003 .......................................................................................... 0.134 0.030 0.235 ¥0.215 ¥0.061 0.015 0.091 0.343 

2004 .......................................................................................... 0.095 0.039 0.262 ¥0.259 ¥0.060 0.023 0.095 0.549 

2005 .......................................................................................... 0.058 0.078 0.276 ¥0.221 ¥0.038 0.036 0.111 0.617 

2006 .......................................................................................... 0.074 0.082 0.338 ¥0.344 ¥0.042 0.029 0.141 0.671 

2007 .......................................................................................... 0.140 0.079 0.386 ¥0.389 ¥0.060 0.034 0.198 0.639 

2008 .......................................................................................... 0.087 0.100 0.603 ¥0.785 ¥0.142 0.055 0.343 1.054 

2009 .......................................................................................... 0.126 0.143 0.537 ¥0.557 ¥0.079 0.020 0.342 1.027 

2010 .......................................................................................... 0.072 0.066 0.353 ¥0.436 ¥0.046 0.022 0.164 0.635 

2011 .......................................................................................... 0.035 0.068 0.412 ¥0.550 ¥0.040 0.021 0.170 0.766 

2012 .......................................................................................... 0.058 0.072 0.286 ¥0.309 ¥0.019 0.022 0.141 0.582 

2013 .......................................................................................... 0.060 0.035 0.278 ¥0.352 ¥0.025 0.017 0.091 0.432 

2014 .......................................................................................... 0.046 0.038 0.216 ¥0.245 ¥0.013 0.016 0.082 0.351 

2015 .......................................................................................... 0.036 0.042 0.235 ¥0.25 ¥0.015 0.015 0.079 0.401 

2016 .......................................................................................... 0.026 0.044 0.228 ¥0.222 ¥0.015 0.013 0.091 0.389 

2017 .......................................................................................... 0.069 0.058 0.159 ¥0.085 ¥0.008 0.015 0.094 0.332 

Average ..................................................................................... 0.074 0.065 0.320 ¥0.348 ¥0.044 0.024 0.149 0.586 

The table reports time-series averages of cross-sectional descriptive statistics of premiums/discounts (%). The TNA-Weighted Average is weighted based on an 

ETF’s previous month’s total net assets. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. Fund premiums or discounts are 

from daily Bloomberg data covering 1,838 funds for a total of 2,732,620 daily observations. Per Bloomberg, premium/discount (%) is the difference between the fund’s 

closing price on the day of the most recent Net Asset Value (NAV) and the NAV of the fund on that day. The data covers the period from 01/03/2003 to 08/31/2017. 

Premiums and discounts to NAV per 

share also vary considerably by the type 

of assets that make up the ETF.443 We 

use Morningstar investment categories 

to divide ETFs into groups of similar 

assets and, in Table 5, report the timeseries averages of cross-sectional 

descriptive statistics for premiums/ 

discounts in the different Morningstar 

Investment Categories. We find that the 

TNA-weighted average premium/ 

discount ranges from as low as 0.003% 

for alternative to 0.197% for taxable 

bond ETFs. The results are qualitatively 

similar for equal-weighted average 

premium/discounts. 

TABLE 5—TIME-SERIES AVERAGES OF CROSS-SECTIONAL DESCRIPTIVE STATISTICS OF PREMIUM/DISCOUNT (%) BY

MORNINGSTAR INVESTMENT CATEGORY

Category 

Equal 

weighted 

average 

TNA 

weighted 

average 

SD P5 P25 P50 P75 P95 

Allocation ................................................................................... 0.072 0.083 0.233 ¥0.119 ¥0.039 0.047 0.237 0.295 

Alternative ................................................................................. 0.007 0.003 0.345 ¥0.404 ¥0.126 ¥0.004 0.116 0.468 

Commodities ............................................................................. 0.211 0.112 0.481 ¥0.545 0.011 0.084 0.158 1.007 

International Equity ................................................................... 0.185 0.193 0.440 ¥0.482 ¥0.068 0.204 0.458 0.833 

Municipal Bond .......................................................................... 0.086 0.076 0.314 ¥0.358 ¥0.090 0.061 0.273 0.532 

Sector Equity ............................................................................. 0.031 0.013 0.189 ¥0.243 ¥0.074 0.005 0.085 0.304 

Taxable Bond ............................................................................ 0.207 0.197 0.206 ¥0.068 0.088 0.188 0.273 0.539 

U.S. Equity ................................................................................ ¥0.001 0.005 0.079 ¥0.104 ¥0.036 0.008 0.048 0.113 

The table reports time-series averages of cross-sectional descriptive statistics of premiums/discounts (%). The funds are first divided into groups based on 

Morningstar categories. The TNA-Weighted Average is weighted based on an ETF’s previous month’s total net assets. SD refers to standard deviation. Columns P5 

to P95 refer to the 5th to 95th percentiles. Fund premiums or discounts are from daily Bloomberg data covering 1,838 funds for a total of 2,732,620 daily observations. Per Bloomberg, premium/discount (%) is the difference between the fund’s closing price on the day of the most recent Net Asset Value (NAV) and the NAV of 

the fund on that day. The data covers the period from 01/03/2003 to 08/31/2017. 

When the ETF arbitrage mechanism 

functions effectively, ETFs also should 

trade at smaller bid-ask spreads.444 As 

shown in Table 6, the TNA-weighted 

average bid-ask spread, as a percentage 

of the mid-price, has declined from 

0.062% in 2012 to 0.030% in 2017.445

The table shows a qualitatively similar 

decreasing pattern when using equalweighted average bid-ask spreads. The 

percentiles of the bid-ask spreads also 

follow a decreasing trend. For example, 

we observe that the median bid-ask 

spread drops from 0.024% in 2012 to 

0.016% in 2017 (see column P50). The 

table also shows that the bid-ask spread 

varies considerably. For example, the 

average standard deviation of the bidask spread (0.081%) is almost twice as 

large as its average (0.043%). 


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446See, e.g. Madhavan Article, supra footnote 

130. 

447The proposal would however rescind relief 

that has been provided to allow master-feeder 

arrangements for those ETFs that do not currently 

rely on the relief. In addition, we propose to 

grandfather existing master-feeder arrangements 

involving ETF feeder funds, but prevent the 

formation of new ones, by amending relevant 

exemptive orders. 

448ETFs relying on exemptive orders that we 

propose to rescind could no longer rely on their 

orders to launch additional ETFs. 

TABLE 6—TIME-SERIES AVERAGES OF CROSS-SECTIONAL DESCRIPTIVE STATISTICS OF RELATIVE BID-ASK SPREAD (%) 

Year 

Equal 

weighted 

average 

TNA 

weighted 

average 

SD P5 P25 P50 P75 P95 

2012 .......................................................................................... 0.370 0.062 0.125 0.007 0.016 0.024 0.049 0.275 

2013 .......................................................................................... 0.330 0.053 0.106 0.006 0.014 0.022 0.048 0.212 

2014 .......................................................................................... 0.273 0.038 0.061 0.005 0.012 0.020 0.045 0.114 

2015 .......................................................................................... 0.324 0.039 0.067 0.005 0.012 0.019 0.045 0.122 

2016 .......................................................................................... 0.372 0.037 0.066 0.005 0.011 0.019 0.038 0.111 

2017 .......................................................................................... 0.349 0.030 0.063 0.004 0.009 0.016 0.030 0.086 

Average ..................................................................................... 0.336 0.043 0.081 0.005 0.012 0.020 0.043 0.153 

This table reports time-series averages of cross-sectional descriptive statistic of relative bid-ask spreads (%). The TNA-Weighted Average is weighted based on an 

ETF’s previous month’s total net assets. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. Bid-ask spreads are from daily 

Bloomberg data covering 1,838 funds for a total of 1,843,729 daily bid-ask spreads. Per Bloomberg, the bid-ask spread (%) is the average of all bid/ask spreads 

taken as a percentage of the mid-price. The data covers the period from 01/03/2003 to 08/31/2017. 

Table 7 reports bid-ask spreads for 

ETF shares by Morningstar category. US 

Equity ETFs have the smallest average 

bid-ask spread of 0.027%, whereas 

allocation ETFs—funds that seek to 

provide both income and capital 

appreciation by investing in multiple 

asset classes, including stocks, bonds, 

and cash strategy—have the largest 

average bid-ask spread of 0.223%. 

TABLE 7—TIME-SERIES AVERAGES OF CROSS-SECTIONAL DESCRIPTIVE STATISTICS OF RELATIVE BID-ASK SPREAD (%) 

BY MORNINGSTAR INVESTMENT

Category 

Equal 

weighted 

average 

TNA 

weighted 

average 

SD P5 P25 P50 P75 P95 

Allocation ................................................................................... 0.590 0.223 0.307 0.073 0.084 0.147 0.227 0.642 

Alternative ................................................................................. 0.391 0.094 0.162 0.017 0.03 0.047 0.089 0.315 

Commodities ............................................................................. 0.353 0.041 0.060 0.009 0.009 0.009 0.061 0.118 

International Equity ................................................................... 0.450 0.072 0.110 0.017 0.024 0.030 0.086 0.212 

Municipal Bond .......................................................................... 0.281 0.100 0.111 0.038 0.045 0.064 0.107 0.306 

Sector Equity ............................................................................. 0.285 0.061 0.092 0.015 0.018 0.036 0.062 0.198 

Taxable Bond ............................................................................ 0.306 0.043 0.080 0.011 0.014 0.016 0.041 0.159 

U.S. Equity ................................................................................ 0.207 0.027 0.041 0.006 0.012 0.014 0.029 0.081 

This table reports time-series averages of cross-sectional descriptive statistic of relative bid-ask spreads (%). The funds are first divided into groups based on 

Morningstar categories. The mean is weighted based on an ETF’s previous month TNA and the data covers the period from 01/03/2012 to 08/31/2017. SD, Min and 

Max refer to standard deviation, minimum and maximum. Columns P5 to P95 refer to the 5th to 95th percentiles. Bid-ask spreads are from daily Bloomberg data covering 1,838 funds for a total of 1,843,729 daily bid-ask spreads. Per Bloomberg, the bid-ask spread (%) is the average of all bid/ask spreads taken as a percentage of 

the mid-price. 

The summary statistics presented thus 

far in this section suggest that the 

arbitrage mechanism generally functions 

effectively during normal market 

conditions. However, as described 

above in section III.B, the Commission 

has observed periods of market stress 

during which the arbitrage mechanism 

has functioned less effectively and 

during which there were significant 

deviations for some ETFs between 

market price and NAV per share and 

when bid-ask spreads widened 

considerably. We note, however, that 

these conditions only persisted for very 

short periods of time for the periods of 

market stress we have observed, 

suggesting that the arbitrage mechanism 

recovered quickly.446

C. Benefits and Costs of Proposed Rule 

6c–11 and Amendments to Forms N–1A 

and N–8B–2 

The Commission is sensitive to the 

economic effects that could result from 

proposed rule 6c–11 and amendments 

to Forms N–1A and N–8B–2, including 

benefits and costs. However, as 

discussed in further detail below, the 

Commission is unable to quantify many 

of the economic effects, either because 

they are inherently difficult to quantify 

or because we lack the information 

necessary to provide a reasonable 

estimate. 

1. Proposed Rule 6c–11 

Proposed rule 6c–11 would allow new 

ETFs to operate in reliance on a rule 

rather than individual exemptive orders 

if they meet the requirements and 

conditions of the rule. In addition, we 

propose to rescind all existing ETF 

exemptive orders, with the exception of: 

(i) The section 12(d)(1) relief included 

in those orders; 447 and (ii) orders 

relating to ETFs structured as UITs, 

leveraged ETFs, and those that are 

organized as a share class of a mutual 

fund.448 This section first evaluates the 

general considerations associated with 

the proposed rulemaking and then 

discusses the effects of the specific 

requirements and conditions of the 

proposed rule. 

a. General Considerations 

Proposed rule 6c–11 would grant 

exemptive relief from the provisions of 

the Act that would otherwise prohibit 

several features essential to the ETF 

structure. This section evaluates the 

overall effect of reducing the expense 

and delay of operating certain new ETFs 

by granting this exemptive relief as part 

of a rule rather than through the 

individual exemptive order process. 

As the requirements and conditions of 

the proposed rule are either similar to 

those contained in existing exemptive 

orders, consistent with market practice, 

or generally provide more flexibility, we 

anticipate that the proposed rule and 

the related rescission of ETF exemptive 


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449As discussed below, some ETFs would incur 

additional costs as a result of the rule’s requirement 

to adopt and implement written policies and 

procedures that govern the construction of basket 

assets and the process that will be used for the 

acceptance of basket assets, the rule’s additional 

website disclosure requirements, and the proposed 

amendments to Forms N–1A and N–8B–2. The 

operation of such ETFs may therefore become more 

costly, on balance, to the extent that these costs are 

not offset by the benefits from the other parts of the 

proposed rule, such as the increased basket 

flexibility and, for new funds, the reduced costs of 

forming the fund. 

450Compared to the baseline, these cost and time 

savings would only accrue to such new ETFs whose 

sponsors have not received exemptive relief that 

would allow such ETFs to operate. 

451This estimate is based on the following 

calculation: 25 × $100,000 = $2,500,000. 

452We estimate that assessing the requirements of 

the proposed rule would require 5 hours of a 

compliance manager ($298 per hour) and 5 hours 

of a compliance attorney ($352 per hour), resulting 

in a cost of $6,500 (10 × $298 + 10 × $352) per fund. 

The total cost for all 1,635 ETFs that could rely on 

the proposed rule would thus be $10,627,500 (1,635 

× $6,500). The Commission’s estimates of the 

relevant wage rates are based on salary information 

for the securities industry compiled by the 

Securities Industry and Financial Markets 

Association’s Office Salaries in the Securities 

Industry 2013. The estimated wage figures are 

modified by Commission staff to account for an 

1,800-hour work-year and multiplied by 2.93 to 

account for bonuses, firm size, employee benefits, 

overhead, and adjusted to account for the effects of 

inflation. See Securities Industry and Financial 

Markets Association, Report on Management & 

Professional Earnings in the Securities Industry 

2013 (‘‘SIFMA Report’’). 

relief would not require any existing 

ETFs whose exemptive relief would be 

rescinded to significantly change the 

way they operate. Conversely, some 

funds whose exemptive orders contain 

conditions that are more restrictive than 

those contained in the proposed rule 

may decide to change the way they 

operate in order to make use of such 

increased flexibility. 

Relative to the baseline, proposed rule 

6c–11 would eliminate the costs 

associated with applying to the 

Commission for an exemptive order to 

form and operate as an ETF for funds 

relying on the rule. Specifically, the 

process of forming new ETFs in reliance 

on the proposed rule would be quicker, 

more predictable, less complex, and 

therefore less costly than obtaining an 

exemptive order as new ETFs are 

currently required to do. ETFs that 

could not rely on the rule, which 

includes those structured as UITs, 

leveraged ETFs, and those that are 

organized as a share class of a mutual 

fund, would continue to be required to 

apply for an exemptive order to form 

and operate.449

As described above in section IV.B.2, 

we estimate that the cost for a typical 

ETF of filing for exemptive relief is 

$100,000. In addition, based on our 

review of exemptive orders that granted 

relief for unleveraged ETFs between 

January 2007 and mid-March 2018, the 

median processing time from the filing 

of an initial application to the issuance 

of an order was 221 days, although there 

was considerable variation. Thus, any 

new ETF planning to operate within the 

parameters set forth by the proposed 

rule would save this expected cost and 

avoid this delay. In addition, such ETFs 

would avoid the uncertainty about the 

length of the delay associated with the 

exemptive order process, allowing 

sponsors to better control the timetable 

for launching a new ETF product in a 

way that maximizes benefits to its 

business. Conversely, funds that are not 

able to comply with the conditions of 

the rule would continue to need to 

apply for an exemptive order. Assuming 

that the number of new ETFs seeking to 

form and operate under the proposed 

rule that would otherwise have needed 

to apply for exemptive relief is equal to 

the average number of ETFs that have 

applied for exemptive relief since 2007, 

these cost and time savings would 

accrue to approximately 25 ETFs per 

year.450 Using this assumption, the 

annual costs savings to this group of 

ETF sponsors would equal $2.5 

million.451 We are unable to quantify 

the benefit a new ETF would derive 

from avoiding the delay and the 

uncertainty about the length of the delay 

associated with the exemptive order 

process as the cost of a delayed 

registration for a new ETF is inherently 

difficult to measure. 

By eliminating the need for ETFs that 

can rely on the proposed rule to seek an 

exemptive order from the Commission, 

the proposed rule would also eliminate 

certain indirect costs associated with 

the exemptive application process. 

Specifically, ETFs that apply for an 

order forgo potential market 

opportunities until they receive the 

order, while others forgo the market 

opportunity entirely rather than seek an 

exemptive order because they have 

concluded that the cost of seeking an 

exemptive order would exceed the 

anticipated benefit of the market 

opportunity. 

In addition, we believe that the 

proposed rule would make it easier for 

some fund complexes to ensure that 

each ETF in the complex is in 

compliance with regulations. 

Specifically, we anticipate that it would 

be easier, and thus less costly, for ETF 

complexes that today operate funds 

under multiple exemptive orders to 

ensure compliance with a single set of 

requirements and conditions contained 

in the proposed rule rather than with 

multiple exemptive orders to the extent 

that the orders vary in the requirements 

and conditions they contain. 

We acknowledge that fund complexes 

may initially incur costs associated with 

assessing the requirements of the 

proposed rule. However, we believe that 

these costs would be relatively small.452

In addition, we anticipate that it would 

be easier for third-party providers, such 

as lawyers and compliance consultants, 

to offer services that help ETFs ensure 

compliance with the proposed rules, 

which will have broad applicability, 

than is currently the case with ETFs 

relying on exemptive orders with 

varying conditions. As a result, third 

party service providers may be able to 

reduce the price of their services, 

compared to the baseline, for ETFs that 

could rely on the proposed rule, which 

may partially or fully offset the initial 

costs of studying the requirements of the 

proposed rulemaking that ETFs may 

incur. 

We expect that the proposed rule also 

would benefit ETF investors to the 

extent it would remove a possible 

disincentive for ETF sponsors to form 

and operate new ETFs that provide 

investors with additional investment 

choices for which these sponsors 

currently do not have relief. As noted 

above, the direct and indirect costs of 

the exemptive application process may 

discourage potential sponsors, 

particularly sponsors interested in 

offering smaller, more narrowly focused 

ETFs that may serve the particular 

investment needs of certain investors. 

By eliminating the need for individual 

exemptive relief we anticipate that the 

proposed rule would accelerate the rate 

at which the ETF industry would 

otherwise grow. In those circumstances, 

the proposed rule would provide ETF 

investors with greater investment 

choices. 

As we discuss below in section IV.D, 

we believe that the proposed rule could 

increase competition in the ETF market 

as a whole, which could also lead to 

lower fees. Any effect of increased 

competition on fees would likely be 

larger for segments of the ETF market 

that currently may be less competitive 

(e.g., active ETFs) and smaller for 

segments of the market that currently 

may be more competitive (e.g., indexbased ETFs tracking major stock 

indices). 

Additionally, some types of funds 

could experience reductions in trading 

costs associated with bid-ask spreads or 

premiums and discounts to NAV per 

share. Specifically, as discussed below 

in section IV.C.1.c, the proposed rule’s 

increased basket flexibility could reduce 


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37388 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

453There is research to support that fund 

investors are sensitive to fees. For instance, one 

paper (Erik R. Sirri & Peter Tufano, Costly Search 

and Mutual Fund Flows, 53 The Journal of Finance 

5 (1998)) finds that ‘‘lower-fee funds and funds that 

reduce their fees grow faster’’. However, we 

acknowledge that there are studies that suggest that 

investors’ sensitivity to fees may be limited. For 

instance, one experimental study (James J. Choi, 

David Laibson, & Brigitte C. Madrian, Why does the 

law of one price fail? An experiment on index 

mutual funds, 23 The Review of Financial Studies 

4 (2010)) finds that investors may not always pick 

the lowest-fee fund when presented with a menu 

of otherwise identical funds to choose from. In 

addition, other studies (e.g., Michael J. Cooper, 

Michael Halling, & Wenhao Yang, The Mutual Fund 

Fee Puzzle, Working Paper (2016)) find evidence of 

significant fee dispersion among mutual funds, 

even after controlling for other observable 

differences between funds. While these studies 

investigate the sensitivity of investors to fees of 

mutual funds rather than ETFs, we believe that 

these results are likely hold for ETFs as well. We 

are not aware of any studies that specifically study 

the sensitivity of ETF investors to fees. 

454 Investments in ETFs are one of many ways for 

investors to save. If investors choose to increase 

their investment in ETFs, there can be two sources 

for this additional investment: (1) An increase in 

overall savings and (2) a decrease in savings 

allocated to other investments, such as mutual 

funds. These two sources are not mutually 

exclusive, so that an increase in ETF investments 

can be accompanied by both an increase in overall 

savings and a decrease in savings invested 

elsewhere, for example in mutual funds. 

455See, e.g., Jonathan B. Berk & Peter DeMarzo, 

Corporate Finance, 3rd Ed (2013). 

456For a detailed discussion of the ETF arbitrage 

mechanism, see, e.g., CFA Guide, supra footnote 

370. 

the cost of arbitrage for authorized 

participants of fixed-income, 

international and actively managed 

ETFs more than for authorized 

participants and other market 

participants of other types of ETFs. This 

could potentially lead to a reduction in 

costs for investors associated with bidask spreads and premiums and 

discounts to NAV per share for fixedincome and international ETFs that 

could be significantly smaller or 

immaterial for other types of ETFs. 

As discussed above, by eliminating 

the need for individual exemptive relief, 

we anticipate that the proposed rule 

would, over time, lead to an increase in 

ETFs that can meet the requirements 

and conditions of the rule and thus 

reinforce the current growth trend in the 

ETF industry. In addition, the proposed 

rule would increase demand for such 

ETFs, to the extent that such ETFs lower 

their fees to investors and investors are 

sensitive to fees.453 To the extent that 

some ETFs would experience larger 

reductions in trading costs (e.g., fixedincome, international, and active) or 

larger increases in competition (e.g., 

actively managed), demand for these 

types of ETFs would likely increase 

more than for other types of ETFs. The 

increased demand would likely be due 

in part to investors substituting away 

from comparable types of funds, such as 

mutual funds, and possibly due to 

investors increasing the rate at which 

they save.454 Consequently, the 

proposed rule could increase total assets 

of ETFs and could decrease total assets 

of other funds, such as mutual funds. 

The size of these effects would depend 

on the degree to which ETFs would 

lower their fees or experience reduced 

trading costs, as well as on the 

sensitivity of investor demand for ETFs 

and other funds to changes in ETF fees 

and trading costs. We are unable to 

quantify these effects on investor 

demand for various types of funds, in 

part, because we cannot estimate the 

extent to which funds would lower their 

fees or experience reduced trading costs 

and how lower fees and trading costs 

could change investor demand. 

Since ETFs are traded in the 

secondary market, an increase in total 

assets of ETFs would likely coincide 

with larger trade volumes for the 

exchanges where ETFs are traded, as 

well as the clearing agencies and brokerdealers involved in these trades. To the 

extent that these market participants are 

compensated by volume, the proposed 

rule would thus benefit them by leading 

to an increase in revenues. 

In addition, we expect the proposed 

rule to remove applications for more 

standard forms of exemptive relief from 

consideration, leaving for staff review 

only applications for more complex or 

novel exemptive relief that falls outside 

the parameters of the proposed rule. To 

the extent that this speeds up the 

processing time for these remaining 

applications, the proposal may reduce 

the indirect costs of forming and 

operating for funds that seek to operate 

outside its parameters. 

b. Conditions for Reliance on Proposed 

Rule 

Proposed rule 6c–11 contains several 

conditions that are designed to facilitate 

an effective arbitrage mechanism, 

reduce costs, and inform and protect 

investors. Beyond the general impact of 

reducing the expense and delay of new 

ETFs discussed above, much of the 

codification of conditions in proposed 

rule 6c–11 does not offer any additional 

benefits or costs when measured against 

the baseline, as they are generally 

codifications of the current regulatory 

practice. However, some conditions are 

departures from current exemptive 

orders or current market practice and 

we discuss the effects of these 

departures in more detail below. 

i. Conditions We Believe May Facilitate 

an Effective Arbitrage Mechanism 

Arbitrage is the practice of buying and 

selling equivalent or similar assets (or 

portfolios of assets) in different markets 

to take advantage of a price 

difference.455 As a consequence, 

arbitrageurs generate price pressure that 

works to equalize the prices of these 

assets across different markets. 

Arbitrage is thus important for investors 

as it helps ensure that asset prices 

reflect market fundamentals (i.e., are 

efficient) irrespective of the market in 

which they are traded. 

The ETF structure makes use of such 

an arbitrage mechanism with the goal of 

establishing a close link between the 

price of an ETF’s shares and the NAV 

per share of the ETF portfolio. 

Specifically, as discussed above, the 

combination of the creation and 

redemption process with the secondary 

market trading in ETF shares provides 

arbitrage opportunities that, if effective, 

help keep the market price of ETF 

shares at or close to the NAV per share 

of the ETF and also help reduce bid-ask 

spreads of ETF shares. Smaller 

deviations of ETF prices from the NAV 

per share of the ETF benefit investors as 

they allow investors to transact in ETF 

shares at prices closer to the value of the 

ETF’s underlying portfolio of securities. 

Similarly, small bid-ask spreads for ETF 

shares benefit investors as they reduce 

the cost to trading ETF shares.456

There are several factors that are 

important for arbitrageurs to determine 

the existence of arbitrage opportunities 

and execute an arbitrage strategy 

effectively. First, when the assets 

involved in the arbitrage are similar but 

not the same, as is the case for ETFs, 

arbitrage will be more effective the more 

closely the prices of the two assets track 

each other and the more transparency 

arbitrageurs have into any factors that 

may cause price differences between the 

two assets. In addition, arbitrage 

requires that arbitrageurs have the 

ability to enter into the trades necessary 

to execute the arbitrage strategy, and 

arbitrage is more effective the smaller 

and more predictable the associated 

trading costs are. The proposed rule 

contains several provisions (many 

codifying current exemptive orders) that 

take these considerations into account 

and are designed to promote the 

effective functioning of the arbitrage 

mechanism for ETFs. 

First, the proposed rule would require 

ETFs relying on the rule to adopt and 

implement written policies and 

procedures that govern the construction 

of basket assets and the process that will 

be used for the acceptance of basket 

assets, including policies and 


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457While exemptive orders do not require ETFs 

to have policies and procedures for basket assets in 

place, we believe that some ETFs may currently 

have methodologies or compliance policies for 

basket assets in place. 

458See infra footnote 553. 

459See infra footnote 554. 

460This estimate is based on the following 

calculation: ($10,268 + $3,985) × 1,635 ETFs = 

$23,303,655. This estimate may be an over-estimate 

in that it assumes that all ETFs, regardless of their 

actual use of custom baskets, would implement 

policies and procedures for custom basket assets. 

461Actively managed ETFs and some ETFs that 

track an index from an affiliated index provider 

have been required to disclose their holdings prior 

to the commencement of trading each business day 

(i.e., full portfolio transparency). Other index-based 

ETFs are permitted to disclose their portfolio 

holdings indirectly, by specifying which index they 

seek to track, as long as the index provider lists the 

constituent securities on its website (i.e., index 

transparency) or by disclosing the components of 

their baskets. Some index-based ETFs have been 

required to provide full portfolio transparency. See 

discussion of portfolio transparency, supra section 

II.C.4.a; see also supra footnote 207 and 

accompanying text. 

462From a staff review of ETF websites, the 

sampled index and actively-managed ETFs already 

provide daily portfolio holdings. Extrapolating the 

sampled results to the entire universe of ETFs, ETFs 

in general should bear no additional costs above the 

baseline to collect and maintain on their websites 

these holdings. If some ETFs that were not sampled, 

however, do not currently maintain on their 

websites their daily portfolio holdings, Commission 

staff estimates that an ETF each year would spend 

approximately 5 hours of professional time to 

update the relevant web page daily with this 

information at a cost of $1,405.50. See supra note 

537. We preliminarily believe that the number of 

ETFs that would have to bear these additional costs 

would be small due to our experience with the 

sampled ETFs. 

463The proposed rule would require that portfolio 

holdings information be presented and contain 

information regarding description, amount, value 

and/or unrealized gain/loss (if applicable) in the 

manner prescribed within Article 12 of Regulation 

S–X. 

464This estimate is based on the following 

calculations: 3 hours (for website development) × 

$296.50 per hour (blended rate for a senior systems 

analyst ($274) and senior programmer ($319) + 2 

hours (for review of current portfolio disclosures) 

× $325 (blended rate for a compliance manager 

($298) and a compliance attorney ($352)) + $400 for 

external website development = $1,939.50. The 

industry cost is 1,635 × $1,939.50 = $3,171,082.50. 

procedures specific to the creation of 

custom baskets. 

As discussed in section II.C.5.a, the 

proposed additional policies and 

procedures requirements for custom 

baskets are designed to reduce the 

potential for cherry-picking, dumping, 

and other potential abuses by 

authorized participants. We 

acknowledge that this principles-based 

approach may not be effective at 

preventing all such abuses by 

authorized participants. However, as 

proposed, ETFs would be required to 

maintain records related to the custom 

baskets used, which would allow the 

Commission to examine for potential 

abuses. 

As outlined above, current exemptive 

orders contain varying provisions for 

basket flexibility. However, based on a 

staff review of existing orders, we 

believe that the existing ETFs that 

would operate under the proposed rule 

and have their exemptive orders 

rescinded would not be required to 

change how they construct their baskets, 

because the proposed rule would give 

ETFs the ability to implement policies 

and procedures for basket flexibility, 

subject to certain enumerated 

requirements for the custom basket 

policies and procedures. In addition, we 

expect that some existing ETFs that 

would operate under the proposed rule 

would be able to implement policies 

and procedures with respect to basket 

flexibility that would give them more 

flexibility than what is allowed by their 

existing exemptive orders. 

We believe that fixed-income, 

international, and actively managed 

ETFs would particularly benefit from 

the increased basket flexibility the rule 

would afford compared to existing 

exemptive orders. Specifically, the 

increased basket flexibility should allow 

fixed-income ETFs to avoid losing hardto-find bonds when meeting 

redemptions or to use sampling 

techniques to construct baskets that are 

composed of fewer individual bonds 

and thus reduce trading costs for 

authorized participants. Similarly, 

international ETFs would be able to 

tailor their creation and redemption 

baskets to accommodate difficulties in 

transacting in certain international 

securities. In addition, actively managed 

ETFs would, in certain instances, be 

able to use the increased basket 

flexibility to acquire or dispose of 

securities by adjusting the composition 

of the creation or redemption basket 

rather than by directly purchasing or 

selling the securities. In these instances, 

actively managed funds would be able 

to reduce certain transaction costs, such 

as those associated with bid-ask 

spreads. 

For these reasons we believe the 

proposed rule would benefit ETFs that 

make use of the increased basket 

flexibility the rule affords as well as 

their investors to the extent that ETFs 

are able to implement procedures that 

facilitate the arbitrage mechanism or 

reduce costs for the ETFs. Due to a lack 

of data, however, we are unable to 

quantify the number of ETFs that would 

choose to implement policies and 

procedures to increase basket flexibility, 

and thus the potential benefits arising to 

ETFs and their investors. 

To the extent that existing ETFs do 

not already have policies and 

procedures governing basket assets in 

place, ETFs would incur a cost 

associated with developing and 

implementing such policies and 

procedures.457 However, such costs may 

be partially or totally offset by the 

basket flexibility discussed above. As 

discussed in section IV.B, we estimate 

that an average ETF would incur an 

initial cost of $10,268 458 associated 

with setting up the process for 

documenting the construction and 

acceptance of baskets and with 

documenting and adopting the custom 

basket policies and procedures. In 

addition, we estimate that an average 

ETF would incur an ongoing cost of 

$3,985 459 each year to review and 

update its custom basket policies and 

procedures as well as its process for 

documenting the construction and 

acceptance of baskets. We thus estimate 

that the total industry cost associated 

with the policies and procedures 

requirement in the proposed rule for 

ETFs that could rely on the rule in the 

first year would equal $23,303,655.460

Second, the proposed rule would 

require an ETF to disclose prominently 

on its website the portfolio holdings that 

will form the basis for the next 

calculation of NAV per share. We 

believe that this requirement supports 

the effective functioning of the arbitrage 

mechanism as it allows authorized 

participants to identify arbitrage 

opportunities and chose an appropriate 

hedging strategy. 

As discussed above in section III.B.4, 

the requirements for portfolio 

transparency in existing exemptive 

orders have varied.461 As also discussed 

in section III.B.4, based on a staff review 

of ETFs’ websites, we understand that 

all ETFs that could rely on the proposed 

rule currently provide daily full 

portfolio transparency, including all 

actively managed ETFs, and thus 

already bear ongoing costs associated 

with maintaining such disclosures.462

However, we believe that the ETFs that 

could rely on the proposed rule would 

incur a one-time cost associated with 

reviewing whether their current 

portfolio disclosure is compliant with 

the requirements of proposed rule 6c–11 

and, if necessary, make changes to the 

information that is presented on their 

website.463 We estimate this one-time 

cost to be $1,939.50 for the average ETF, 

resulting in an aggregate one-time cost 

of $3,171,082.50 for all ETFs that could 

rely on the proposed rule.464

Finally, the proposed rule also would 

require additional disclosure by the ETF 

of the median daily bid-ask spread over 

the most recent fiscal year on its 

website. We believe that this 


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465Commission staff estimate a one-time cost of 

computing and implementing processes and 

systems for daily updating of the median bid-ask 

spread of one burden hour at a per hour cost of 

$296.50 (blended rate for a senior systems analyst 

($274) and senior programmer ($319)). The onetime cost of updating the web page to include the 

median bid-ask spread would be incorporated as 

part of the web page development discussed in 

section IV.B.1 (see also infra footnote 535). As 

median bid-ask spreads are not currently required 

to be reported or computed by ETFs, we estimate 

that the aggregate costs would be $296.50 × 1,635 

ETFs = $484,777.50. 

466Commission staff estimate a one-time cost of 

computing and implementing processes and 

systems for daily updating of historical prices of 

one burden hour at a per hour cost of $296.50 

(blended rate for a senior systems analyst ($274) 

and senior programmer ($319)). Although we 

preliminarily estimate that funds already maintain 

a record of historical prices, an upper bound on 

aggregate costs would be estimated at $296.50 × 

1,635 ETFs = $484,777.50. 

467While the IIV may be very accurate for ETFs 

whose underlying assets trade frequently (and thus 

are liquid as well), such ETFs also tend to have 

small premiums/discounts to NAV per share, 

reducing the incremental usefulness of the IIV for 

investors in these ETFs compared to observing only 

the ETF’s share price. 

468As discussed above, we believe that 

authorized participants would share this 

information with other market participants as 

necessary, for example when a market participant 

uses an authorized participant as agent for 

transacting with an ETF and this information is a 

necessary part of the creation or redemption 

process. 

469We estimate that the omission of this 

requirement would save 0.25 hours of a compliance 

attorney ($352 per hour), resulting in a cost savings 

of $88 (0.25 × $352) per fund each year. The total 

cost savings for all 1,635 ETFs that could rely on 

the proposed rule would thus be $143,880 (1,635 

× $88). 

470See supra footnote 208. 

471According to the most recent U.S. census data, 

approximately 77.2% of U.S. households had some 

form of internet access in their home in 2015 and 

86.8% have a computer (e.g., desktop, laptop, tablet 

or smartphone). See Camille Ryan & Jamie M. 

Lewis, Computer and internet Usage in the United 

States: 2015, ACS–37 (Sept. 2017), available at 

https://www.census.gov/content/dam/Census/ 

library/publications/2017/acs/acs-37.pdf; see also 

Sarah Holden, Daniel Schrass & Michael Bogdan, 

Ownership of Mutual Funds, Shareholder 

Sentiment, and Use of the internet, 2017 (Oct. 

2017), available at https://www.ici.org/pdf/per23- 

07.pdf (‘‘[i]n mid-2017, 95 percent of households 

owning mutual funds had internet access, up from 

about two-thirds in 2000’’ and ‘‘86 percent of 

requirement would further inform 

investors about the expected cost of 

trading an ETF and facilitate 

comparison of transaction costs across 

ETFs. As such, the disclosure of median 

bid-ask spreads could reduce investors’ 

uncertainty about the trading 

environment and facilitate the selection 

of ETF investments that fit individual 

investors’ needs. Currently, disclosure 

of median bid-ask spreads by ETFs are 

not required by exemptive orders, 

although some funds may voluntarily 

provide this information on their 

websites. For those funds that do not 

already disclose this information, they 

would have to implement processes and 

systems to compute the median bid-ask 

spreads and would have to 

accommodate a new data point on their 

web page to report this information. We 

preliminarily do not believe the 

incremental cost of such disclosure will 

be substantial. The estimated costs for 

computing and establishing processes 

and systems to update the median bidask spread are $296.50 per fund, while 

aggregate costs for computing and 

updating the web pages of ETFs to 

include the median bid-ask spread 

would be $484,777.50.465 We 

preliminarily believe that funds will 

incorporate the processes of updating 

the median bid-ask spread with other 

daily processes associated with 

updating the web page, such as 

reporting the daily portfolio holdings, 

and therefore, there will be no 

additional daily costs associated with 

updating the median bid-ask spread on 

the webpage. We also believe that funds 

currently maintain a record of historical 

prices as a matter of current business 

practices which could be used to satisfy 

the requirement at a nominal cost, as 

discussed above. If a fund does not 

maintain a record of historical prices, it 

may incur a one-time estimated cost of 

$296.50 to satisfy the requirement, or an 

upper bound of $484,777.50 in 

aggregate, assuming that no ETFs 

currently maintain historical price 

records.466

ii. Omission of Conditions We Believe 

May Save Costs for Funds 

First, the proposed rule would not 

contain a requirement that an ETF’s IIV 

be disseminated at least every 15 

seconds during regular trading hours (60 

seconds for international ETFs), as is 

currently required under all exemptive 

orders. We believe that many 

sophisticated institutional market 

participants do not rely on the IIV to 

value an ETF’s assets, as discussed 

above in section II.C.3. 

In some cases, the IIV may not reflect 

the actual value of an ETF’s assets (e.g., 

for funds that invest in foreign securities 

whose markets are closed during the 

ETF’s trading day or funds whose assets 

trade infrequently, as is the case for 

certain bond funds). In those cases, we 

believe that both institutional and retail 

market participants would benefit from 

the omission of the IIV as a requirement 

of the proposed rule by avoiding the 

possibility that investors base their 

investment decisions on this potentially 

misleading information. However, the 

IIV may, for certain funds, provide a 

reasonably accurate estimate of the 

value of an ETF’s assets, including for 

those funds whose underlying assets are 

very frequently traded during the ETF’s 

trading day. Less sophisticated 

institutional investors as well as retail 

investors relying on the IIV for those 

ETFs may thus find the IIV useful and 

could see their ability to evaluate ETFs 

reduced without this metric.467

Exchange listing standards currently 

require the IIV to be disseminated. As 

long as exchange listing standards 

continue to include this requirement, 

the proposed rule’s omission of such a 

requirement would not represent a 

change from the baseline and would not 

result in any costs or benefits to market 

participants. Nonetheless, if the listing 

standards change, ETFs would not be 

subject to the cost of dissemination of 

IIV information under the proposed 

rule. 

Second, under the terms of the 

exemptive orders, ETFs are required to 

disclose in their registration statement 

that redemptions may be postponed for 

foreign holidays. The proposed 

amendments to Forms N–1A and N–8B– 

2 do not contain such a requirement and 

would thus eliminate the cost of 

preparing and updating this disclosure 

for existing ETFs. As discussed above in 

section III.B.4, we believe that such a 

requirement is not necessary, since this 

information is already covered by the 

agreement between the ETF and the 

authorized participant.468 As discussed 

in section III.C.1, we further believe that 

such a disclosure would not be relevant 

for retail investors, who purchase ETF 

shares on the secondary market. 

Third, the proposed rule would not 

require an ETF to identify itself in any 

sales literature as an ETF that does not 

sell or redeem individual shares and 

explain that investors may purchase or 

sell individual ETF shares through a 

broker via a national securities 

exchange. Although this condition has 

been included in our exemptive orders, 

we no longer believe that it is necessary 

given that markets have become familiar 

with ETFs in the multiple decades they 

have been available. The omission of 

such a requirement could lead to cost 

savings for existing and future ETFs 

associated with preparing and reviewing 

this disclosure for sales literature.469

iii. Website Disclosure Provisions 

Proposed rule 6c–11 would require an 

ETF to disclose certain information 

prominently on its website, which is 

publicly accessible and free of 

charge.470 The goal of these disclosure 

requirements is to provide investors 

with key metrics to evaluate their 

trading and investment decisions in a 

location that is easily accessible and 

frequently updated.471 Based on a staff 


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mutual fund-owning households with a household 

head aged 65 or older had internet access in mid2017’’); Andrew Perrin & Maeve Duggan, 

Americans’ Internet Access: 2000–2015, Pew 

Research Center (June 2015), available at http://

assets.pewresearch.org/wp-content/uploads/sites/ 

14/2015/06/2015-06-26_internet-usage-acrossdemographics-discover_FINAL.pdf (finding in 2015, 

84% of all U.S. adults use the internet). Retail 

investors that do not have internet access in their 

homes may have access outside their homes, such 

as at public libraries. 

472See supra footnote 437. 

473See supra footnote 437. 

474See infra section II.H.4. 

475This estimate is based on the following 

calculations: 3 hours (for website development) × 

$296.50 per hour (blended rate for a senior systems 

analyst ($274) and senior programmer ($319)) + (2 

hours (for review of website disclosures) × $325 

(blended rate for a compliance manager ($298) and 

a compliance attorney ($352)) + $400 for an external 

website developer to develop the web page = 

$1,939.50. 

476This estimate is based on the following 

calculations: 0.5 hours (for website updates) × 

$296.50 per hour (blended rate for a senior systems 

analyst ($274) and senior programmer ($319)) + (1 

hour (for review of website disclosures) × $325 

(blended rate for a compliance manager ($298) and 

a compliance attorney ($352) = $473.25. 

477This estimate represents the average of the 

percentage of ETFs for which the reporting 

requirement was triggered at least once in a given 

year, for those ETFs that could rely on the proposed 

rule. During the sample period from 2008 to 2017, 

the percentage of ETFs for which the reporting 

requirement was triggered at least once varied from 

1.5% in 2010 to 10% in 2008. 

478We believe that such disclosure would require 

4 internal hours (2.5 hours for the compliance 

attorney to determine if this requirement has been 

triggered and produce a draft of the required 

disclosures + 1.5 hours for the webmaster to 

include the information on the website), at a time 

cost of (2.5 hours × $352 compliance attorney 

hourly rate) + (1.5 hours × $239 webmaster hourly 

rate) in addition to $200 for external website 

development = $1,738.50. The annual cost of this 

requirement for those ETFs that could rely on the 

proposed rule is calculated as 4.7% × 1,635 ETFs 

× $1,738.50 = $110,541.53. 

479As proposed, the rule would require that 

basket information be presented and contain 

information regarding description, amount, value 

and/or unrealized gain/loss (if applicable) in the 

manner prescribed within Article 12 of Regulation 

S–X. 

480This estimate is based on the following 

calculations: 4.5 hours (for website development) × 

$296.50 per hour (blended rate for a senior systems 

analyst ($274) and senior programmer ($319)) + (3 

hours (for review of website disclosures) × $325 

(blended rate for a compliance manager ($298) and 

a compliance attorney ($352)) + $600 for an external 

website developer to develop the web page = 

$2,909.25. 

481This estimate is based on the following 

calculations: 1 hour (for website updates) × $296.50 

per hour (blended rate for a senior systems analyst 

($274) and senior programmer ($319)) + (1.5 hours 

(for review of website disclosures) × $325 (blended 

rate for a compliance manager ($298) and a 

compliance attorney ($352) = $784. 

482This estimate is based on the following 

calculation: 1,635 ETFs × ($2,909.25 + $784) = 

$6,038,463.75. 

review of ETFs’ websites, we believe 

that all ETFs that could rely on the 

proposed rule currently have a 

website.472 As a consequence, existing 

ETFs would generally not incur any 

additional cost associated with the 

creation and technical maintenance of a 

website. 

As discussed above, a requirement for 

daily website disclosures of NAV, 

closing price, and premiums and 

discounts—each as of the end of the 

prior business day has been included in 

substantially all exemptive relief orders 

starting from 2008. As discussed in 

section III.B.4, based on a staff review of 

ETFs’ websites, we believe that all ETFs 

that could rely on the proposed rule 

currently provide daily website 

disclosures of NAV, closing price, and 

premiums or discounts.473 As a 

consequence, existing ETFs would 

generally not incur any additional cost 

associated with these website disclosure 

requirements. 

Our exemptive orders have not 

included requirements for line graph 

and tabular historical information 

regarding premiums and discounts. 

However, Form N–1A contains tabular 

website disclosures relating historical 

premium/discount in Items 11(g)(2) and 

27(b)(7)(iv), which we are proposing to 

eliminate.474 Nonetheless, we anticipate 

that all existing ETFs that fall within the 

scope of the proposed rule would incur 

some additional costs associated with 

these disclosures. We believe that 

substantially all ETFs already have the 

required data available to them as part 

of their regular operations (as it is 

required by Form N–1A and also allows 

ETFs to monitor the trading behavior of 

their shares), as well as have systems 

(such as computer equipment, an 

internet connection, and a website) in 

place that can be used for processing 

this data and uploading it to their 

websites. However, these ETFs would 

still incur the costs associated with 

establishing and following (potentially 

automated) processes for processing and 

uploading this data to their websites. 

We estimate that an average ETF would 

incur a one-time cost of $1,939.5 475 for 

implementing this website disclosure 

and an ongoing cost of $473.25 476 per 

year for updating the relevant web page 

with this information. We thus estimate 

the total industry cost, in the first year, 

to ETFs that could rely on the proposed 

rule for providing this website 

disclosure, of $3,944,846.35. 

Our exemptive orders have not 

included a requirement for ETFs to 

provide disclosure of the factors that 

materially contributed to a premium or 

discount, if known, if an ETF’s premium 

or discount is greater than 2% for more 

than seven consecutive trading days. As 

a result, under the proposed rule those 

ETFs that experience such a premium or 

discount would incur additional costs 

associated with determining what 

factors contributed to the premiums or 

discounts and drafting and uploading a 

discussion to their website. Based on a 

staff analysis of historical data on ETF 

premiums and discounts from 2008 to 

2017 using Bloomberg data, we believe 

that this disclosure requirement would 

be triggered for, on average, 4.7% of 

those ETFs that could rely on the 

proposed rule per year.477 We estimate 

that a fund required to make such a 

disclosure in a given year would incur 

an average cost of $1,438.50, yielding a 

total annual industry cost of 

$110,541.53.478

The proposed rule would also require 

an ETF to post on its website one 

‘‘published’’ basket at the beginning of 

each business day. While we believe 

that authorized participants already 

have access to this information in the 

daily portfolio composition file 

provided to NSCC, many market 

participants, such as smaller 

institutional investors and retail 

investors, are not NSCC members and 

do not currently have access to this 

information. 

Our exemptive orders have not 

included requirements for daily website 

disclosures of ETF baskets. As a result, 

we anticipate that all existing ETFs that 

rely on the proposed rule would incur 

additional costs associated with this 

disclosure.479 Since specifying basket 

assets is part of the regular operation of 

an ETF, we believe that all ETFs already 

have the required data available to 

them. In addition, we believe that most 

ETFs already have systems (such as 

computer equipment, an internet 

connection, and a website) in place that 

can be used for processing this data and 

uploading it to their websites. However, 

these ETFs would still incur the costs 

associated with establishing and 

following (potentially automated) 

processes for processing and uploading 

this data to their websites. We estimate 

that an average ETF would incur a onetime cost of $2,909.25 480 for 

implementing this website disclosure 

and an ongoing cost of $784 481 per year 

for updating the relevant web page daily 

with this information. We thus estimate 

the total industry cost, in the first year, 

to ETFs that could rely on the proposed 

rule for providing this website 

disclosure, of 6,038,463.75.482

As discussed in section IV.A above, 

the proposed disclosures on ETFs’ 

websites, which are publicly available 

and free of charge, would enable 

investors to more readily obtain certain 

key metrics for individual ETFs, 


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483See supra footnote 208. 

484ETFs already will be required to provide some 

information about authorized participants on Form 

N–CEN, including the name of each authorized 

participant, additional identifying information, and 

the dollar values of the fund shares the authorized 

participant purchased and redeemed during the 

reporting period. However, this information alone 

would not be sufficient for Commission staff to 

evaluate whether a fund’s authorized participant 

agreements are in compliance with the proposed 

rule. 

485See infra footnote 544. 

486An average ETF would have to maintain and 

store 34 authorized participant agreements. See 

supra footnote 431 and accompanying text. 

487This estimate is based on the following 

calculation: 1,635 ETFs × $380 × 20% = $124,260. 

488This estimate is based on a total record 

keeping cost of $380 per ETF over five years, see 

infra note 544, 25% × $380 = $95, $95 × 1,635 ETFs 

= $155,325. 

489See supra footnote 341. 

490As discussed above, without this relief, the 

affected funds could continue operating by effecting 

creation and redemption transactions between 

authorized participants and the feeder fund (as well 

as the transactions between the master and feeder 

fund) in cash rather than in kind. As cash creations 

and redemptions can be less efficient than in-kind 

transactions for certain ETFs, this could impose a 

cost on the ETFs that are part of the fund family. 

Cash redemptions and creations could also affect 

the current relationships that funds have with 

authorized participants if the authorized 

participants would be unwilling to perform the 

arbitrage function when receiving cash instead of 

baskets of securities, which could have unintended 

spillover effects on the secondary market trading of 

these funds’ shares. Alternatively, these feeder 

funds may opt to pursue their investment objectives 

through direct investments in securities and/or 

other financial instruments, rather than through 

investments in master funds. Such a restructuring 

of the funds involved would also lead to costs 

(primarily associated with legal and accounting 

work) on the ETFs that are part of the fund family. 

As a result, if this change would require portfolio 

transactions to occur at the fund, there could be 

additional costs such as lower overall total returns 

to the fund or that investors may find the fund to 

be a less attractive investment. 

potentially resulting in better informed 

investment decisions.483 The proposed 

conditions standardize certain content 

requirements to facilitate investor 

analysis of information while allowing 

ETFs to select a format for posting 

information that the individual ETF 

finds most efficient and appropriate for 

their website. Because the information 

in the proposed disclosures would be 

made available on individual websites, 

in the format chosen by the ETF, we 

acknowledge that an investor’s ability to 

efficiently extract information from 

website disclosures for purposes of 

aggregation, comparison, and analysis 

across multiple funds and time periods 

may be limited. Investors seeking to 

compare multiple ETFs would have to 

visit the website of every ETF, navigate 

to the relevant section of the website, 

and extract the information provided in 

the format chosen by the fund. 

Depending on the manner in which a 

typical fund investor would use the 

website disclosures, these 

considerations may decrease the 

information benefits of the proposed 

disclosures. However, we recognize that 

investors may rely on third-party 

providers that aggregate such 

information for all ETFs into a 

structured format that investors can 

more easily access and process for the 

purpose of statistical and comparative 

analyses. While investors may incur 

costs of obtaining information from 

third-party service providers, it would 

likely be lower than the cost they would 

incur than if they performed the 

collection themselves, and the cost of 

such services may otherwise be reduced 

as a result of competition among service 

providers. Overall, we believe that 

requiring ETFs to provide this 

information on their websites would 

ultimately provide an efficient means 

for facilitating investor access to 

information. 

c. Recordkeeping 

The proposed rule would require that 

ETFs preserve and maintain copies of 

all written authorized participant 

agreements for at least five years, the 

first two years in an easily accessible 

place. This requirement would provide 

Commission examination staff with a 

basis to evaluate whether the authorized 

participant agreement is in compliance 

with the rule and other provisions of the 

Investment Company Act and the rules 

thereunder, and would also promote 

internal supervision and compliance.484

As the agreement forms the contractual 

foundation on which authorized 

participants engage in arbitrage activity, 

compliance of the agreement with the 

proposed rule is important for the 

arbitrage mechanism to function 

properly. 

We are also proposing to require ETFs 

to maintain information regarding the 

baskets exchanged with authorized 

participants on each business day the 

ETF exchanged creation units, including 

a record stating that the custom basket 

complies with the ETF’s custom basket 

policies and procedures. As discussed 

above, we believe that these records 

would help our examination staff 

understand how baskets are being used 

by ETFs, evaluate compliance with the 

rule and other provisions of the Act and 

rules thereunder, and examine for 

potential overreach by ETFs in 

connection with the use of custom 

baskets or transactions with affiliates. 

Existing exemptive orders have not 

required ETFs to preserve and maintain 

copies of authorized participant 

agreements or information about basket 

composition. However, we believe that 

most ETFs already preserve and 

maintain copies of authorized 

participant agreements as well as data 

on baskets used as a matter of 

established business practice. Existing 

ETFs that do not already preserve and 

maintain copies of these documents and 

data, as well as all new ETFs that would 

operate under the proposed rule, would 

incur maintenance and storage costs 

associated with these requirements. As 

discussed in section IV.B, we estimate 

that an average ETF that does not 

currently comply with these 

recordkeeping requirements would 

incur an annual cost of $380 per year 485

to maintain these records.486 Assuming 

that 20% of ETFs would incur this cost, 

the total industry cost for ETFs that 

could rely on the proposed rule would 

be $124,260 per year.487 In addition, the 

existing orders have not required that 

ETFs prepare and maintain a record 

stating that custom baskets comply with 

the custom basket policies and 

procedures. We anticipate that all ETFs 

that could operate under the proposed 

rule will incur additional recordkeeping 

costs associated with the requirement 

that custom baskets comply with 

custom basket policies and procedures. 

Assuming that 25% of the total annual 

recordkeeping costs can be attributed to 

the new requirement for custom baskets, 

we estimate a total cost per ETF of $95 

per year for the requisite five-year 

period and an annual industry cost of 

$155,325 for ETFs that could rely on the 

rule.488

d. Master-Feeder Relief 

The proposed rule would rescind the 

master-feeder relief granted to ETFs that 

do not rely on the relief as of the date 

of this proposal. We are proposing to 

rescind such relief because there 

generally is a lack of interest in ETF 

master-feeder arrangements, and certain 

master-feeder arrangements raise policy 

concerns discussed above. While there 

are currently many exemptive orders 

that contain the master-feeder relief, it 

is our understanding that only one fund 

complex currently relies on this relief to 

structure several master-feeder 

arrangements with one master and one 

feeder fund each.489 As discussed 

above, we would also propose to 

grandfather existing master-feeder 

arrangements involving ETF feeder 

funds, but prevent the formation of new 

ones, by amending relevant exemptive 

orders.490 As a result, we do not expect 

that the rescission of the existing 

master-feeder relief would impose costs 

on ETFs that currently rely on the relief 

to structure master-feeder arrangements. 


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491See supra section II.F. 

492As discussed in more detail below in section 

V.D, the ongoing costs of complying with the 

proposed amendments to Form N–8B–2 for all UIT 

ETFs as well as the one-time initial costs for 

existing UIT ETFs would accrue to Form S–6. 

493We estimate that each ETF would incur a onetime burden of an additional 20 hours, at a time 

cost of an additional $6,710 (10 hours x $335.50 

(blended rate for a compliance attorney ($352) and 

a senior programmer ($319)) = $6,710) to draft and 

finalize the required disclosure, amend its 

registration statement, implement the interactive 

calculator, and update its website. 

494We estimate that each ETF would incur an 

ongoing burden of an additional 10 hours, at a time 

cost of an additional $3,355 (10 hours × $335.50 

(blended rate for a compliance attorney ($352) and 

a senior programmer ($319)) = $3,355) each year to 

review and update the proposed disclosures. 

495Like all information disclosed in Items 2, 3, or 

4 of Form N–1A, the information disclosed in 

amended Item 3 would have to be tagged and 

submitted in a structured data format. See supra 

footnote 361. We note that we are adopting 

amendments to require the use of Inline XBRL 

format in a companion release, which would apply 

to the information disclosed in amended Item 3 

according to the compliance dates of those 

amendments. See Inline XBRL Filing of Tagged 

Data, Investment Company Act Release No. 33139 

(June 28, 2018). Given that filers already have 

systems in place to submit the existing information 

in Item 3 in a structured format and that filers will 

already be required to update those systems to 

comply with the Inline XBRL requirement, we 

believe that there would not be any significant 

additional costs associated with the information in 

amended Item 3 being filed in a structured format. 

496This estimate is based on the following 

calculation: 1,900 ETFs × ($6,710 + $3,355) = 

$19,123,500. 

497The proposed disclosure requirements would 

also serve to increase investors’ awareness of the 

trading costs that they can incur when trading 

ETFs, which can be substantial in some cases. As 

a result, investors who may previously not have 

been fully aware of these costs may shift their 

demand away from ETFs and towards other types 

of funds, such as mutual funds. We believe, 

however, that the rulemaking as a whole is likely 

to increase demand for ETFs rather than decrease 

it. 

498 In documenting the impact of ETF arbitrage on 

price efficiency and liquidity, the academic 

literature does not generally distinguish ETFs that 

could rely on the rule from those that could not. 

However, these studies investigate a broad range of 

ETFs with varying degrees of relief including basket 

flexibility. Therefore, we believe that the subsample 

of ETFs that could rely on the rule (those organized 

as open-end funds that are not leveraged) is 

representative of those used in the academic 

literature. As a result, we believe that inferences 

from the academic research generally apply to ETFs 

that can rely on the rule. 

499Lawrence Glosten, Suresh Nallareddy & Yuan 

Zou, ETF Trading and Informational Efficiency of 

Underlying Securities, Columbia Business School 

Research Paper No. 16–71 (2016). 

500See Itzhak Ben-David, Francesco Franzoni & 

Rabih Moussawi, Do ETFs Increase Volatility?, 

Swiss Finance Institute Research Paper No. 11–66 

(2017). This paper also finds that mutual fund 

ownership is associated with higher volatility in the 

underlying indexes. Thus, to the extent that part of 

the increase in ETF assets would be accompanied 

by a decrease in mutual fund assets, the net effect 

on price efficiency would be unclear. 

At the same time, the rescission of the 

relief may benefit investors in 

prospective feeder ETFs to the extent 

that it protects them from any concerns 

associated with feeder ETFs discussed 

above.491

2. Disclosure (Amendments to Forms N– 

1A and N–8B–2) 

The amendments to Form N–1A and 

N–8B–2 are designed to provide 

authorized participants and investors 

with tailored information regarding the 

costs associated with investing in ETFs. 

As discussed in section IV.A above, we 

expect that the new disclosures would 

benefit investors by helping them better 

understand and compare specific funds, 

potentially resulting in more informed 

investment decisions, more efficient 

allocation of investor capital, and 

greater competition for investor capital 

among funds. 

As discussed above, we propose to 

add a set of Q&As related to fees and 

trading information and costs that we 

anticipate would help investors better 

understand costs specific to ETFs, such 

as bid-ask spreads, brokerage 

commissions, and purchasing or selling 

ETF shares at a premium or discount to 

NAV. The answers to the Q&As would 

include information about trading costs 

specific to an ETF, such as the median 

bid-ask spread over the previous year. 

In addition, the proposed 

amendments to Forms N–1A and N–8B– 

2 would require an ETF to provide 

information on the ETF’s median bidask spread as well as an interactive 

calculator on the ETF’s website that can 

be used to determine how the bid-ask 

spread would impact the costs 

associated with frequent trading of ETF 

shares. As discussed above, the purpose 

of the interactive calculator is to provide 

investors with the ability to customize 

the hypothetical calculations in Item 3 

of Form N–1A to their specific investing 

situation by choosing either the number 

or size of the hypothetical round-trip 

trades, or both. 

While we believe that substantially all 

ETFs already have the required data for 

these new disclosures on Forms N–1A 

and N–8B–2 and for the interactive 

calculator as part of their regular 

operations, these funds would still incur 

costs for processing the data, entering 

them into the form, and programming 

the interactive calculator.492 We 

estimate that each ETF would incur a 

one-time cost of $6,710 493 and an 

ongoing cost of $3,355 494 per year.495

We thus estimate that the total industry 

cost for ETFs in the first year would 

equal $19,123,500.496

D. Effects on Efficiency, Competition, 

and Capital Formation 

This section evaluates the impact of 

proposed rule 6c–11 and the 

amendments to Forms N–1A and N–8B– 

2 on efficiency, competition, and capital 

formation. However, as discussed in 

further detail below, the Commission is 

unable to quantify many of the effects 

on efficiency, competition and capital 

formation either because they are 

inherently difficult to quantify or 

because it lacks the information 

necessary to provide a reasonable 

estimate. 

1. Efficiency 

The proposed rule would likely 

increase total assets of ETFs, as a result 

of reducing the expense and delay of 

forming and operating new ETFs 

organized as open-end funds, reducing 

the cost for certain ETFs to monitor 

their own compliance with regulations, 

and as well increased competition 

among ETFs as discussed below. At the 

same time, the proposed rule could lead 

to a decrease in total assets of other fund 

types that investors may regard as 

substitutes, such as certain mutual 

funds.497 As a result, ETF ownership (as 

a percentage of market capitalization) 

for some securities, such as stocks and 

bonds, would likely increase, and 

ownership by other funds, such as 

mutual funds, would likely decrease. 

The academic literature that we discuss 

in this section suggest that such a shift 

in ownership could affect the price 

efficiency (the extent to which an asset 

price reflects all public information at 

any point in time) and liquidity of these 

portfolio securities.498

The literature suggests that a shift in 

stock ownership towards ETFs may 

improve some dimensions of price 

efficiency while impeding price 

efficiency along other dimensions. 

Specifically, the results in one paper 

suggest that stock prices incorporate 

systematic information more quickly 

when they are held in ETF portfolios.499

The evidence in this paper thus 

indicates that ETF activity increases 

stock market efficiency with regard to 

systematic information, i.e., information 

relating to market-wide risks. On the 

other hand, some studies find that an 

increase in ETF ownership may 

introduce non-fundamental volatility 

into stock prices, i.e., cause temporary 

deviations of stock prices from their 

fundamental values. For example, one 

paper finds that ownership by US equity 

index ETFs is associated with higher 

volatility among component stocks and 

argues that the increased volatility is 

non-fundamental.500 Another paper 

finds that higher authorized participant 

arbitrage activity in US equity ETFs is 


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501Zhi Da & Sophie Shive, Exchange Traded 

Funds and Asset Return Correlations, Working 

Paper, Notre Dame University (2016). 

502See Sophia JW. Hamm, The effect of ETFs on 

stock liquidity, Working Paper, Ohio State 

University (2014). However, the study also finds the 

same relationship for ownership by index mutual 

funds. Thus, to the extent that part of the increase 

in ETF assets would be accompanied by a decrease 

in mutual fund assets, the net effect on price 

efficiency would be unclear. 

503Caitlin Dillon Dannhauser, The Impact of 

Innovation: Evidence from Corporate Bond ETFs, 

Journal of Financial Economics, forthcoming (2016) 

(‘‘Dannhauser Article’’). 

504 Jayoung Nam, Market Accessibility, Corporate 

Bond ETFs, and Liquidity, Working Paper, Indiana 

University Bloomington (2017). 

505 Vikas Agarwal, Paul Hanouna, et al., Do ETFs 

Increase the Commonality in Liquidity of 

Underlying Stocks, Working Paper, Villanova 

University (2017). 

506This would be the case for those ETFs that 

hold less liquid securities in their portfolios. 

507Under rule 22e–4 under the Act, an ETF is 

required to consider: (i) The relationship between 

portfolio liquidity and the way in which, and the 

prices and spreads at which, ETF shares trade, 

including, the efficiency of the arbitrage mechanism 

and the level of active participation by market 

participants (including authorized participants); 

and (ii) the effect of the composition of baskets on 

the overall liquidity of the ETF’s portfolio as part 

of its assessment, management and review of 

liquidity risk. See LRM Adopting Release, supra 

footnote 101. 

508Conversely, some ETFs may choose to 

decrease, rather than increase, the weight of more 

liquid securities and increase the weight of less 

liquid securities in their basket compared to their 

portfolio in order to reduce transaction costs borne 

by an ETF’s existing/remaining shareholders when 

the ETF must buy and sell portfolio holdings. This 

would lead to a reduction in transaction costs for 

existing/remaining shareholders and to an increase 

in transactions costs for authorized participants 

and, ultimately, investors buying and selling ETF 

shares. Thus, we believe that most funds would 

choose to limit such behavior as they would likely 

find it to be in their best interest to balance costs 

imposed on remaining and existing/remaining 

shareholders. 

509 James J. Angel, Todd J. Broms, & Gary L. 

Gastineau, ETF Transaction Costs Are Often Higher 

Than Investors Realize, 42 The Journal of Portfolio 

Management 3, 65–75 (2016) find that the cost of 

trading ETF shares depends both on bid-ask spreads 

as well as premiums and discounts to NAV per 

share. 

510The types of funds and products that investors 

may consider substitutes for ETFs would depend on 

an individual investor’s preferences and investment 

objectives. Other types of products that some 

investors may consider to be substitutes for ETFs 

include closed-end funds and other exchangetraded products, such as exchange-traded notes and 

commodity pools. 

associated with a higher correlation of 

returns among stocks in the ETF’s 

portfolio.501 The authors find evidence 

that changes in the prices of these stocks 

tend to partially revert over the next 

trading day and argue that the increased 

co-movement in returns is thus a sign of 

excessive price movement due to nonfundamental shocks that ETF trading 

helps propagate. 

The proposed rule could decrease the 

liquidity of stocks held by ETFs, as one 

study finds that higher ownership of a 

stock by US equity ETFs is associated 

with lower liquidity as measured by 

market impact.502 Conversely, the 

academic literature offers mixed 

evidence regarding the impact of ETFs 

on bond liquidity. While one paper 

finds that increased ETF ownership is 

associated with lower bond liquidity for 

investment grade bonds,503 another 

study finds that bonds included in ETFs 

experience improvements in their 

liquidity.504

A shift in stock ownership towards 

ETFs could also have an effect on the 

co-movement of liquidity for stocks held 

by ETFs. Specifically, one paper 

observes that the liquidity of a stock 

with high ETF ownership co-moves 

with the liquidity of other stocks that 

also have high ETF ownership.505 The 

authors argue that this co-movement in 

liquidity represents a risk to investors, 

as it exposes them to the possibility that 

many assets in their portfolio will be 

illiquid at the same time. 

Since we do not know the degree to 

which the proposed rule would increase 

ETF ownership of stocks and bonds, we 

are unable to quantify the proposed 

rule’s effects on price efficiency and 

liquidity. 

As a result of the proposed rule’s 

allowance of increased basket 

flexibility, some ETFs that did not 

already have this flexibility in their 

baskets may choose to increase the 

weight of more liquid securities and 

decrease the weight of less liquid 

securities in their baskets compared to 

their portfolios.506 During normal 

market conditions, this may lead those 

ETFs’ shares to trade at smaller bid-ask 

spreads, thus benefiting investors. We 

note, however, that such a reduction in 

bid-ask spreads by over-weighting more 

liquid securities may not work during 

stressed market conditions, if a large 

proportion of such an ETF’s portfolio 

securities become less liquid.507 As a 

result, the gap between bid-ask spreads 

of some ETFs’ shares during normal and 

stressed market periods may grow as a 

result of the proposed rulemaking, 

which some investors may not 

anticipate and fail to fully take into 

account when making their investment 

decisions.508

Finally, the proposed amendments to 

Forms N–1A and N–8B–2 as well as the 

additional website disclosures required 

by proposed rule 6c–11 would allow 

investors and other market participants 

to better understand and compare ETFs 

using more relevant and standardized 

disclosure. For example, as discussed 

above, the proposed amendments to 

Item 3 of Form N–1A would add a 

requirement for ETFs to disclose their 

median bid-ask spread and include a 

statement that ETF investors may be 

subject to other expenses that are 

specific to ETF trading, including 

brokerage commissions and potential 

costs related to purchasing ETF shares 

at a premium or discount to NAV per 

share.509 These costs are not currently 

required to be disclosed by Item 3. Since 

these costs are incurred by ETF 

investors and not mutual fund investors, 

we believe that adding this disclosure 

would help investors and other market 

participants better assess and compare 

fees and expenses between certain funds 

and fund types, such as ETFs and 

mutual funds. Thus, the proposed rule 

could help investors make more 

informed investment decisions that are 

more suited for their investment 

objectives. The degree to which 

investors would benefit from the ability 

to make more informed investment 

decisions is inherently difficult to 

quantify, so we are unable to estimate 

the size of this benefit. 

2. Competition 

The proposed rule would likely 

increase competition among ETFs that 

could rely on the proposed rule. The 

first channel through which the 

proposed rule would likely foster 

competition is by reducing the costs for 

ETF sponsors to form new ETFs that 

comply with the conditions set by the 

proposed rule. This cost reduction 

would lower the barriers to entering the 

ETF market, which would likely lead to 

increased competition among ETFs that 

could rely on the proposed rule. 

In addition, new ETFs that enter the 

market in reliance on the proposed rule 

as well as those existing ETFs that 

would have their exemptive relief 

rescinded and replaced by the proposed 

rule, would no longer be subject to 

requirements that vary between 

exemptive orders. Instead, these ETFs 

would operate under uniform 

requirements, which would help 

promote competition among ETFs that 

could rely on the proposed rule. 

An increase in competition among 

ETFs that could rely on the proposed 

rule would likely also lead to an 

increase in competition between those 

ETFs and ETFs that could not rely on 

the proposed rule as well as other types 

of funds and products that investors 

may perceive to be substitutes for ETFs, 

such as certain mutual funds.510

Furthermore, as discussed above, the 

proposed website disclosures and 

amendments to Forms N–1A and N–8B– 

2 would allow investors to compare 

ETFs and other open-end investment 

companies, which could further foster 


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511As discussed above, the proposed rule would 

likely lead to increased competition both among 

ETFs that could rely on the proposed rule as well 

as between ETFs that could rely on the rule and 

those that could not. While we believe that 

increased competition generally is conducive to 

innovation, any increased competition in the ETF 

market resulting from the proposed rule would be 

more likely to involve novel ETFs that would 

continue to need to obtain exemptive relief from the 

Commission. 

512 Dannhauser Article, supra footnote 503. 

513We acknowledge that there is research (see 

Yakov Amihud & Haim Mendelson, Asset Pricing 

and the Bid-Ask Spread, 17 Journal of Financial 

Economics 2, 223–249 (1986)) that provides 

evidence that expected returns of an asset are 

positively associated with its liquidity. As 

discussed above, the academic literature suggests 

that stocks with a higher share of ETF ownership 

have lower liquidity (whereas the evidence on the 

effect of underlying bonds is mixed). Thus, there 

may be an offsetting effect that could weaken the 

potential benefits of the rule for capital formation 

through new equity issuances by firms. 

514Some ETFs may change the way they operate 

voluntarily by taking advantage of the increased 

basket flexibility of the proposed rule. 

515As discussed in above in section IV.B.1, while 

the vast majority of ETFs currently in operation are 

organized as open-end funds, some early ETFs, 

which currently have a significant amount of assets, 

are organized as UITs. Examples include SPDR S&P 

500 ETF Trust (SPY) and PowerShares QQQ Trust, 

Series 1 (QQQ). 

516We note that fund sponsors that plan to 

launch a new ETF organized as a UIT would 

continue to be able to rely on the exemptive order 

process. 

competition among open-end 

investment companies as well as 

between open-end investment 

companies and other types of funds that 

investors may perceive to be substitutes 

for open-end investment companies, 

such as closed-end funds and certain 

exchange-traded products. 

Increased competition would likely 

lead to lower fees for investors, 

encourage financial innovation, and 

increase consumer choice in the markets 

for ETFs, open-end investment 

companies, and other types of funds 

that investors may perceive to be 

substitutes.511 Due to the limited 

availability of data, however, we are 

unable to quantify these effects. 

To the extent the proposed rule would 

increase the number and total assets of 

ETFs, more authorized participants or 

other market participants may enter the 

market. This could lead to increased 

competition among authorized 

participants or other market participants 

and result in authorized participants or 

other market participants exploiting 

arbitrage opportunities sooner (i.e., 

when premiums/discounts to NAV per 

share are smaller). As a result, bid-ask 

spreads may tighten and premiums/ 

discounts to NAV per share for ETF 

shares may decrease. As authorized 

participants and some of the other 

market participants that engage in ETF 

arbitrage are large broker-dealers, 

however, we would expect new entries 

of authorized participants or other 

arbitrageurs as a result of the rule to be 

limited and any effects on bid-ask 

spreads and premiums/discounts to 

NAV per share to be small. 

3. Capital Formation 

The proposed rule may lead to 

increased capital formation. 

Specifically, an increase in the demand 

for ETFs, to the extent that it would 

increase demand for intermediated 

assets as a whole, would likely spill 

over into primary markets for equity and 

debt securities. As a consequence, 

companies may be able to issue new 

debt and equity at higher prices in light 

of the increased demand for these assets 

in secondary markets created by ETFs. 

As a consequence, the cost of capital for 

firms could fall, facilitating capital 

formation. 

The conclusion that an increase in the 

demand for ETFs may lower the firm’s 

cost of capital is further supported by a 

paper 512 that finds that bonds with a 

higher share of ETF ownership have 

lower expected returns.513 Due to the 

limited availability of data, however, we 

are unable to quantify these effects of 

the proposed rule on capital formation. 

E. Reasonable Alternatives 

1. Treatment of Existing Exemptive 

Relief 

As discussed above, we propose to 

rescind the exemptive relief we have 

issued to ETFs that would be permitted 

to rely on the proposed rule. As an 

alternative, we considered allowing 

ETFs with existing exemptive relief in 

orders that do not contain a selftermination clause to continue operating 

under their relief rather than requiring 

them to operate in reliance on the rule. 

The Commission believes that 

allowing ETFs to continue operating 

under their existing relief would create 

differences in the conditions under 

which funds operate. Specifically, some 

ETFs that determine they do not need 

the additional flexibility (e.g., basket 

flexibility) the proposed rule would 

provide compared to their existing 

exemptive relief could choose to 

continue operating under their existing 

relief rather than in reliance on the rule. 

This could allow these ETFs to 

circumvent the other requirements that 

are part of the rule (e.g., daily website 

disclosure of the basket assets). This 

self-selection would create a disparity in 

the conditions under which ETFs are 

allowed to operate. 

Measured against the baseline, the 

alternative would thus have smaller 

benefits arising from improved 

disclosure, including that the alternative 

would not level the playing field among 

ETFs with regard to these conditions 

and thus not be as effective at promoting 

product competition as the proposed 

rule. In addition, it would be more 

difficult for the Commission to evaluate 

compliance with regulations under the 

alternative compared to the proposed 

rule, as some of the ETFs whose 

exemptive relief we propose to rescind 

could choose to continue to operate 

under their exemptive relief. The 

Commission also believes that the costs 

to funds associated with rescinding the 

existing exemptive relief would be 

minimal, as we anticipate that 

substantially all funds whose relief 

would be rescinded would be able to 

continue operating with only minor 

adjustments, other than being required 

to comply with the additional website 

disclosures and to develop basket asset 

policies and procedures.514

2. ETFs Organized as UITs 

Proposed rule 6c–11 would be 

available only to ETFs that are 

organized as open-end funds.515 As an 

alternative, we considered including 

ETFs organized as UITs in the scope of 

the proposed rule. However, as 

discussed above in section III.A.1, we 

believe that the terms and conditions of 

the existing exemptive orders for UITs 

are appropriately tailored to address the 

unique features of the UIT structure. 

In addition, as also discussed above, 

ETFs have greater investment flexibility 

under the open-end fund structure than 

the UIT structure, which leads us to 

believe that most new ETFs entering 

into the market would prefer to operate 

under the open-end fund structure 

rather than the UIT structure. No new 

UIT ETFs have come to market in recent 

years, and we do not think that there 

would be significant economic benefits 

to including UITs in the scope of the 

proposed rule, and thus we propose to 

exclude ETFs organized as UITs from 

the proposed rule.516

3. Basket Flexibility 

Proposed rule 6c–11would require 

ETFs relying on the rule to adopt and 

implement written policies and 

procedures that govern the construction 

of basket assets and the process that will 

be used for the acceptance of basket 

assets. As an alternative, we considered 

requiring that an ETF’s basket generally 

correspond pro rata to its portfolio 

holdings, while identifying certain 

limited circumstances under which an 

ETF may use a non-pro rata basket, as 


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517ETFs whose orders we are proposing to 

rescind and that are operating under exemptive 

orders issued before approximately 2006, which 

included few explicit restrictions, would have 

reduced basket flexibility under the alternative 

compared to the baseline. 

518Section III.D discusses the possibility that 

some ETFs may use the increased basket flexibility 

of the proposed rule to over- or under-weight 

securities in their baskets compared to their 

portfolios based on the liquidity of these securities. 

Such a practice would not be possible under the 

alternative that would require an ETF’s basket to 

generally correspond pro rata to its portfolio 

holdings. 

519We estimate that, under the alternative, an 

average ETF would incur a one-time cost of $3,879 

(6 hours (for website development) × $296.50 per 

hour (blended rate for a senior systems analyst 

($274) and senior programmer ($319)) + (4 hours 

(for review of website disclosures) × $325 (blended 

rate for a compliance manager ($298) and a 

compliance attorney ($352)) + $800 for an external 

website developer to develop the web page = 

$3,879) for implementing this website disclosure 

and an ongoing cost of $1,596.50 (1 hour (for 

website updates) × $296.50 per hour (blended rate 

for a senior systems analyst ($274) and senior 

programmer ($319)) + (4 hours (for review of 

website disclosures) × $325 (blended rate for a 

compliance manager ($298) and a compliance 

attorney ($352)) = $1,596.50) per year for updating 

the relevant web page daily with this information. 

520Structured information can be stored, shared 

and presented in different systems or platforms. 

Standardized markup languages, such as XML or 

XBRL, use sets of data element tags for each 

required reporting element, referred to as 

taxonomies. 

521For example, based on staff experience with 

XML filings, the costs of tagging the information in 

XML are expected to be minimal given the 

technology that will be used to structure the data. 

XML is a widely used data format, and based on 

the Commission’s understanding of current 

practices, most reporting persons and third party 

service providers have production systems already 

in place to report schedules of investments and 

other information. Therefore, we believe systems 

should be able to accommodate XML data without 

significant costs, and large-scale changes will likely 

not be necessary to output structured data files. 

522The Commission has implemented 

requirements for the structuring of certain 

information disclosed by funds. See, e.g., Release 

No. 33–10231 (Oct. 13, 2016) [81 FR 81870]; Release 

No. IC–29132 (Feb. 23, 2010) [75 FR 10059]; Release 

No. 33–9006 (Feb. 11, 2009) [74 FR 7747]. 

we have done in our exemptive orders 

since approximately 2006.517

The requirement included in these 

orders was designed to address the risk 

that an authorized participant or other 

market participant could take advantage 

of its relationship with the ETF (i.e., 

engage in cherry picking or dumping). 

However, as discussed above, we 

believe that the proposed rule’s 

additional policies and procedures 

requirements for custom baskets would 

provide a principles-based approach 

that is designed to limit potential abuses 

so that they would be unlikely to cause 

significant harm to investors. In 

addition, as also discussed above in 

section III.C.1.b, we believe that the 

increased basket flexibility under the 

proposed rule would benefit the 

effective functioning of the arbitrage 

mechanism, particularly benefiting 

fixed-income, international, and 

actively managed ETFs.518

4. Website Disclosure of Every Basket 

Used by an ETF 

Proposed rule 6c–11 would require 

ETFs to post, on the ETF’s website at the 

beginning of each business day, a 

published basket applicable to orders 

for the purchase or redemption of 

creation units to be priced based on the 

ETF’s next calculation of NAV. Because 

an ETF would be required to post only 

one published basket to comply with 

this condition, it would not be required 

to post the contents of its other custom 

baskets in many instances. As an 

alternative, we considered proposing 

that ETFs be required to publish 

information regarding every basket used 

by the ETF after the close of trading on 

each business day. 

The additional disclosure under this 

alternative could reveal whether an 

authorized participant has pressured an 

ETF into accepting illiquid securities in 

exchange for liquid ETF shares (i.e., 

dumping) or into giving an authorized 

participant desirable securities in 

exchange for ETF shares tendered for 

redemption (i.e., cherry-picking) by 

comparing an ETF’s portfolio assets and 

published basket to the baskets used by 

various authorized participants 

throughout the day. 

However, the proposed rule contains 

additional conditions for basket policies 

and procedures, which seek to prevent 

overreaching. Moreover, the proposed 

rule would require an ETF to maintain 

records regarding the baskets used, 

which would allow Commission staff to 

examine an ETF’s use of basket 

flexibility. Consequently, we believe 

that the risk for these abusive practices 

under the proposed rule would be low 

while, at the same time, the rule would 

avoid additional operational and 

compliance costs for ETFs to post and 

review the information, under the 

alternative.519

5. The Use of a Structured Format for 

Additional Website Disclosures and the 

Filing of Additional Website Disclosures 

in a Structured Format on EDGAR 

As discussed in section II.C.6 above, 

we are proposing to require ETFs to post 

on their websites certain disclosures to 

enable investors to more readily obtain 

certain key metrics for individual ETFs. 

The proposed rule would allow ETFs to 

select a format for posting information 

that the individual ETF finds most 

efficient and appropriate for the content 

management system of their website. 

As an alternative, we could require 

ETFs to post the disclosures in a 

structured format on their websites. 

Structured disclosures are made 

machine-readable by having reported 

disclosure items labeled (tagged) using a 

markup language that can be processed 

by software for analysis.520 Compared 

with each ETF selecting its own layout 

and format for the website disclosures, 

the resulting standardization under this 

alternative would allow for extraction, 

aggregation, comparison, and large-scale 

analysis of reported information through 

significantly more automated means 

than is possible with unstructured 

formats such as HTML. This alternative 

would facilitate the extraction and 

analysis through automated means of an 

individual fund’s disclosures over 

time—which would offer the greatest 

benefit for higher-frequency ETF 

disclosures—and potentially the 

comparison of disclosures across a small 

number of ETFs. However, requiring a 

structured disclosure format would not 

lower the collection burden incurred by 

the requirement to separately visit each 

website to obtain each ETFs disclosure. 

The structured data requirement 

could impose an incremental cost on 

ETFs of tagging the information in a 

structured format, particularly to the 

extent that ETFs don’t otherwise 

structure this data for their own 

purposes. Although, if the XML format 

is used for the additional disclosure, the 

incremental cost of tagging information 

in a structured format would likely be 

small.521

As another alternative, we could 

require ETFs to make the additional 

website disclosures available in a 

centralized repository in a structured 

format, such as by filing them on 

EDGAR. Making the information 

available in a structured format on 

EDGAR would likely improve its 

accessibility and the ability of investors, 

the Commission, and other data users to 

efficiently extract information for 

purposes of aggregation, comparison 

and analysis of information across 

multiple funds and time periods.522 As 

stated above, if the XML format is used 

for the additional disclosure, the 

incremental cost of tagging the 

information in a structured format 

would likely be small. However, funds 

would still incur a cost of filing the 

disclosures on EDGAR, which might be 

higher than the cost of posting the 

disclosures on individual ETF websites. 

6. Treatment of Leveraged ETFs 

As discussed in section II.A.3. above, 

leveraged ETFs would not be able to 


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523See supra footnote 77. 

524 44 U.S.C. 3501–3520. 

525 17 CFR 274.11A; 17 CFR 274.12; 17 CFR part 

101; 17 CFR 239.16. 

526 17 CFR 270.0–2. 

rely on proposed rule 6c–11. As an 

alternative, we considered permitting 

leveraged ETFs to rely on the proposed 

rule, while maintaining the status quo of 

existing exemptive orders with respect 

to the amount of leveraged market 

exposure that leveraged ETFs may 

obtain (i.e., 300% of the return or 

inverse return).523 This alternative 

would thus prohibit a leveraged ETF 

from seeking a performance result, 

directly or indirectly, that exceeds three 

times the performance, or inverse 

performance, of the specified market 

index or benchmark. This alternative 

could benefit competition among 

leveraged ETFs as compared to the 

baseline, as fund sponsors that currently 

do not have an exemptive order 

permitting them to operate this type of 

ETF could enter the market. As a result, 

fees for leveraged ETFs would likely 

decrease and their assets could increase. 

However, as discussed in detail in 

section II.A.3., in light of our ongoing 

consideration, including the potential 

staff recommendation of a re-proposal 

on funds’ use of derivatives, we do not 

believe it is appropriate to permit 

sponsors to form and operate leveraged 

ETFs in reliance on our proposed rule. 

F. Request for Comments 

The Commission requests comment 

on all aspects of this initial economic 

analysis, including whether the analysis 

has: (1) Identified all benefits and costs, 

including all effects on efficiency, 

competition, and capital formation; (2) 

given due consideration to each benefit 

and cost, including each effect on 

efficiency, competition, and capital 

formation; and (3) identified and 

considered reasonable alternatives to 

the proposed new rule and disclosure 

amendments. We request and encourage 

any interested person to submit 

comments regarding the proposed rule, 

our analysis of the potential effects of 

the proposed rule and proposed 

amendments, and other matters that 

may have an effect on the proposed rule. 

We request that commenters identify 

sources of data and information as well 

as provide data and information to assist 

us in analyzing the economic 

consequences of the proposed rule and 

proposed amendments. We also are 

interested in comments on the 

qualitative benefits and costs we have 

identified and any benefits and costs we 

may have overlooked. In addition to our 

general request for comment on the 

economic analysis associated with the 

proposed rule and proposed 

amendments, we request specific 

comment on certain aspects of the 

proposal: 

• Would the proposed rule require 

any existing ETFs whose exemptive 

orders would be rescinded to materially 

change the way they operate? If so, what 

types of funds would have to materially 

change the way they operate and it what 

ways? Would these funds require any 

additional exemptive relief to continue 

operating? 

• Would the elimination of the direct 

costs of obtaining exemptive relief result 

in additional benefits to ETFs or their 

investors? Are there other costs of the 

proposed rule that would offset any cost 

savings resulting from not having to file 

an exemptive application? 

• Would the proposed rule result in 

greater product innovation in the ETF 

market? Would the proposed rule result 

in increased investment options? 

• Are we correct to assume that 

substantially all ETFs that are currently 

not required to make daily website 

disclosures of NAV, closing price, and 

premiums and discounts would have 

the data required to make these 

disclosures available to them as part of 

their regular operations as well as 

systems (such as computer equipment, 

an internet connection, and a website) 

in place that can be used for processing 

this data and uploading it to their 

websites? If not, what data or systems 

would currently be unavailable, which 

ETFs would it be unavailable for, and 

what would the cost of acquiring the 

unavailable data or systems be? 

• Do ETFs already have policies and 

procedures in place governing the 

composition of baskets? How long 

would it take and how much would it 

cost to implement such policies and 

procedures for funds that do not already 

have them in place, particularly the 

custom basket policies and procedures? 

• Are we correct to assume that 

substantially all ETFs would already 

have the required data available for 

daily website disclosures of bid-ask 

spreads and historical information 

regarding premiums and discounts as 

well as systems (such as computer 

equipment, an internet connection, and 

a website) in place that can be used for 

processing this data and uploading it to 

their websites? If not, what data or 

systems would currently be unavailable, 

which funds would it be unavailable 

for, and what would the cost of 

acquiring the unavailable data or 

systems be? 

• Are we correct to assume that 

substantially all funds would already 

have the required data to complete the 

new disclosures required by the 

proposed amendments to Forms N–1A 

and N–8B–2 available to them as part of 

their regular operations? If not, what 

data would currently be unavailable, 

which funds would it be unavailable 

for, and what would the cost of 

acquiring the unavailable data be? 

• Is our estimate correct that the cost 

to a typical fund for applying for an ETF 

exemptive order is approximately 

$100,000? If not, what would be a more 

accurate estimate? 

• How many ETFs (representing how 

much in assets) currently are required to 

disclose on their website, free of charge, 

the previous day’s NAV and the price of 

the ETF shares, as well as the premium 

or discount associated with the closing 

price and information pertaining to the 

composition and proportion of 

underlying holdings? How many ETFs 

(representing how much in assets) are 

not required to provide this disclosure 

but nevertheless voluntarily provide it? 

• Do commenters agree that requiring 

ETFs to make the additional website 

disclosures available in a structured 

format, which is an alternative we 

considered, would be associated with 

only a small cost of tagging this 

information? 

• Would the proposed rule lead to 

more competition and lower fees in the 

leveraged ETF market if leveraged ETFs 

were allowed to rely on the rule? 

IV. Paperwork Reduction Act 

A. Introduction 

Proposed rule 6c–11 would result in 

new ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).524 In addition, the proposed 

amendments to Form N–1A, Form N– 

8B–2, and Form N–CEN would impact 

the collection of information burden 

under those forms and Form S–6.525

Proposed rule 6c–11 also would impact 

the current collection of information 

burden of rule 0–2 under the Act.526

The titles for the existing collection of 

information are: ‘‘Form N–1A under the 

Securities Act of 1933 and under the 

Investment Company Act of 1940, 

Registration Statement for Open-End 

Management Companies’’ (OMB No. 

3235–0307); ‘‘Form N–8B–2 under the 

Investment Company Act of 1940, 

Registration Statement of Unit 

Investment Trusts Which are Currently 

Issuing Securities’’ (OMB No. 3235– 

0186); ‘‘Form S–6 [17 CFR 239.19], for 

registration under the Securities Act of 

1933 of Unit Investment Trusts 

registered on Form N–8B–2’’ (OMB 

Control No. 3235–0184); ‘‘Form N– 


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527See 2008 ETF Proposing Release, supra 

footnote 3. 

528See proposed rule 6c–11(a) (defining 

‘‘exchange-traded fund’’). 

529See supra footnote 425 and accompanying 

text. This is estimate does not include UIT ETFs, 

share class ETFs, or leveraged ETFs. 

530See proposed rule 6c–11(c)(1)(i)(A). 

531See proposed rule 6c–11(c)(1)(i)(B). 

532See supra footnote 220. 

533This information would be posted on the 

trading day immediately following the eighth 

consecutive trading day on which the ETF had a 

premium or discount greater than 2% and be 

maintained on the ETF’s website for at least one 

year following the first day it was posted. See supra 

at text following footnote 306. 

534For purposes of this analysis, we estimate that 

1,635 ETFs would be required to make this 

disclosure at least once in their lifetime. 

535This estimate is based on the following 

calculations: (15 hours (for website development) × 

$296.50 per hour (blended rate for a senior systems 

analyst ($274) and senior programmer ($319)) + (10 

hours (for review of website disclosures) × $325 

(blended rate for a compliance manager ($298) and 

a compliance attorney ($352)) = $7,697.50). 

536Based on staff experience, the staff estimates 

that each ETF initially would spend an additional 

$2,000 on external website developers. 

537This estimate is based on the following 

calculations: (2 hours (for website updates) × 

$296.50 per hour (blended rate for a senior systems 

analyst ($274) and senior programmer ($319)) + (2.5 

hours (for review of website disclosures) × $325 

(blended rate for a compliance manager ($298) and 

a compliance attorney ($352)) = $1,405.50. See 

SIFMA Report, supra footnote 452. 

538This estimate is based on the following 

calculation: 13.3 hours × 1,635 ETFs = 21,745.50 

hours. 

CEN’’ (OMB Control No. 3235–0730); 

and ‘‘Rule 0–2 under the Investment 

Company Act of 1940, General 

Requirements of Papers and 

Applications’’ (OMB Control No. 3235– 

0636). The title for the new collection of 

information would be: ‘‘Rule 6c–11 

under the Investment Company Act of 

1940, ‘Exchange-traded funds.’ ’’ The 

Commission is submitting these 

collections of information to the Office 

of Management and Budget (‘‘OMB’’) for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid control 

number. 

We published notice soliciting 

comments on the collection of 

information requirements in the 2008 

ETF Proposing Release and submitted 

the proposed collections of information 

to OMB for review and approval in 

accordance with 44 U.S.C. 3507(d) and 

5 CFR 1320.11.527 We received no 

comments on the collection of 

information requirements. 

We discuss below the collection of 

information burdens associated with 

proposed rule 6c–11 and its impact on 

rule 0–2 as well as proposed 

amendments to Forms N–1A, N–8B–2, 

S–6 and N–CEN. 

B. Proposed Rule 6c–11 

Proposed rule 6c–11 would permit 

ETFs that satisfy certain conditions to 

operate without first obtaining an 

exemptive order from the Commission. 

The rule is designed to create a 

consistent, transparent, and efficient 

regulatory framework for such ETFs and 

facilitate greater competition and 

innovation among ETFs. The proposal 

attempts to eliminate historical 

distinctions and conditions that we no 

longer believe are necessary and thus 

appropriately level the playing field for 

such ETFs that pursue the same or 

similar investment strategies. 

Proposed rule 6c–11 would require an 

ETF to disclose certain information on 

its website, to maintain certain records, 

and to adopt and implement written 

policies and procedures governing their 

constructions of baskets, as well as 

written policies and procedures that set 

forth detailed parameters for the 

construction and acceptance of custom 

baskets that are in the best interests of 

the ETF and its shareholders. These 

requirements are collections of 

information under the PRA. 

The respondents to proposed rule 6c– 

11 would be ETFs registered as openend management investment companies 

other than ETFs within multiple-class 

funds or leveraged ETFs.528 This 

collection would not be mandatory, but 

would be necessary for those ETFs 

seeking to operate without individual 

exemptive orders. We estimate that 

1,635 ETFs would likely rely on rule 

6c–11.529 Information provided to the 

Commission in connection with staff 

examinations or investigations would be 

kept confidential subject to the 

provisions of applicable law. 

1. Website Disclosures 

Under the proposal, ETFs would be 

required to post on their websites: (i) 

The ETF’s NAV per share, market price, 

and premium or discount; and (ii) 

historical information regarding 

premiums and discounts. In addition, 

proposed rule 6c–11 would require an 

ETF to disclose on its website, each 

business day, the portfolio holdings that 

will form the basis for each calculation 

of NAV per share,530 and information 

regarding a published basket that will 

apply to orders for the purchase or 

redemption of creation units each 

business day.531 As proposed, the rule 

would require that portfolio holdings 

and basket information be presented 

and contain information regarding 

description, amount, value and/or 

unrealized gain/loss (if applicable) in 

the manner prescribed within Article 12 

of Regulation S–X.532 Additionally, the 

proposed rule would require an ETF to 

disclose on its website a tabular chart 

and line graph showing the ETF’s 

premiums and discounts for the most 

recently completed calendar year and 

the most recently completed calendar 

quarters of the current year. For new 

ETFs that do not yet have this 

information, the proposed rule would 

require the ETF to post this information 

for the life of the fund. As discussed 

above, we believe the disclosures 

provide useful information to investors 

who purchase and sell ETF shares on 

national securities exchanges. 

Proposed rule 6c–11(c)(1)(v) also 

would require any ETF whose premium 

or discount was greater than 2% for 

more than seven consecutive trading 

days to post that information on its 

website, along with a discussion of the 

factors that are reasonably believed to 

have materially contributed to the 

premium or discount.533 Given the 

proposed threshold, we do not believe 

that many ETFs would be required to 

disclose this information on a routine 

basis. For purposes of this PRA, we 

assume that all ETFs will be required to 

make this disclosure only once in their 

lifetime. Therefore, we believe that this 

requirement will impose only initial 

costs and that there will be no ongoing 

costs associated with it.534

For purposes of the PRA analysis, we 

estimate that an ETF would incur a onetime average burden of 25 hours 

associated with updating the relevant 

website disclosures, at a time cost of 

$7,697.50.535 The staff estimates the 

initial external cost would be $2,000 for 

an external website developer to 

develop the web page.536 Amortized 

over a 3-year period, the hour burden 

per ETF would be approximately 8.3 

hours, at a time cost of $2,565.8, and an 

external cost of approximately $666.65. 

Additionally, Commission staff 

estimates that an ETF each year would 

spend approximately 5 hours of 

professional time to update the relevant 

web page daily with this information, at 

a time cost of $1,405.50.537 Commission 

staff does not believe there will be any 

ongoing external costs related to the 

website disclosure requirements. 

Accordingly, we estimate that the total 

burden for drafting, reviewing and 

uploading the website disclosures 

would be 21,745.50 hours,538 at a time 


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539This estimate is based on the following 

calculation: $3,971.3 × 1,635 ETFs = $6,493,075.50. 

540This estimate is based on the following 

calculation: $666.65 × 1,635 ETFs = $1,089,972.75. 

541See proposed rule 6c–11(d). 

542See supra footnote 325 and accompanying 

text. 

543 Id. 

544This estimate is based on the following 

calculations: 2.5 hours × $60 (hourly rate for a 

general clerk) = $150; 2.5 hours × $92 (hour rate for 

a senior computer operator) = $230. $150 + $230 = 

$380. 

545We estimate that 1,635 ETFs would be 

required to maintain these records. 

546See proposed rule 6c–11(c)(3). 

547See proposed rule 6c–11(c)(3)(i). 

548See supra text accompanying footnote 256. 

549We estimate that all ETFs relying on the rule 

will use custom baskets to some extent. Moreover, 

we estimate that the cost associated with this 

requirement is small because the records detailing 

the composition of each custom basket are readily 

available. 

550This estimate is based on the following 

calculations: 6 hours × 1,635 ETFs = 9,810 hours. 

551This estimate is based on the following 

calculations: 3 hours × 317 (hourly rate for a senior 

manager) = $951; 2 hours × 511 (hourly rate for 

chief compliance officer) = $1,022; 1 hour × $352 

(hourly rate for compliance attorney) = $352; $951 

+ $1,022 + $352 = $2,325; $2,325 × 1,635 ETFs = 

$3,801,375. 

552This estimate is based on the following 

calculation: (6 hours + 20 hours) × 1,635 ETFs = 

42,510 hours. 

553These estimates are based on the following 

calculations: 12 hours × $317 (hourly rate for a 

senior portfolio manager) = $3,804; 12 hours × $480 

(blended hourly rate for assistant general counsel 

($449) and chief compliance officer ($511) = $5,760; 

2 hours (for a fund attorney’s time to prepare and 

review materials) × $352 (hourly rate for a 

compliance attorney) = $704. $3,804 + $5,760 + 

$704 = $10,268; $10,268 × 1,635 ETFs = 

$16,788,180. See SIFMA Report, supra footnote 

452. 

554These estimates are based on the following 

calculations: 5 hours × $317 (hourly rate for a senior 

portfolio manager) = $1,585; 5 hours × $480 

(blended hourly rate for assistant general counsel 

($449) and chief compliance officer ($511) = $2,400. 

$1,585 + $2,400 = $3,985. 

555This estimate is based on the following 

calculation: $3,985 × 1,635 ETFs = $6,515,475. 

556This estimate is based on the following 

calculation: 14,170 hours + 16,350 hours = 30,520 

hours. 

557This estimate is based on the following 

calculation: $5,596,060 + $6,515,475 = $12,111,535. 

558This estimate is based on the following 

calculation: 21,745.5 hours + 8,175 hours + 30,520 

hours = 60,440.5 hours. 

559This estimate is based on the following 

calculation: $6,493,075.50 + $621,300 + 

$12,111,535 = $19,225,910.50. 

560See supra footnote 540 and accompanying 

text. 

561This estimate is based on the following 

calculation: 60,440.5 hours ÷ 1,635 ETFs = 36.97 

hours. 

562This estimate is based on the following 

calculation: $19,225,910.50 ÷ 1,635 ETFs = 

$11,758.97. 

563This estimate is based on the following 

calculation: $1,089,972.75 ÷ 1,635 ETFs = $666.65. 

cost of approximately $6,493,075.50,539

and an external cost of $1,089,972.75.540

2. Recordkeeping 

The proposed rule requires that ETFs 

to preserve and maintain copies of all 

written authorized participant 

agreements.541 Additionally, we are 

proposing to require ETFs to maintain 

records setting forth the following 

information for each basket exchanged 

with an authorized participant: (i) The 

names and quantities of the positions 

composing the basket; (ii) identification 

of the basket as a ‘‘custom basket’’ and 

a record stating that the custom basket 

complies with the ETF’s custom basket 

policies and procedures (if applicable); 

(iii) cash balancing amounts (if any); 

and (iv) the identity of the authorized 

participant conducting the 

transaction.542

ETFs would have to maintain these 

records for at least five years, the first 

two years in an easily accessible 

place.543 We estimate that the burden 

would be 5 hours per ETF to retain 

these records, with 2.5 hours spent by 

a general clerk and 2.5 hours spent by 

a senior computer operator. We estimate 

a time cost per ETF of $380.544 We 

estimate the total recordkeeping burden 

related to rule 6c–11 would be 8,175 

hours, at an aggregate cost of 

$621,300.545

3. Policies and Procedures 

As proposed, rule 6c–11 would 

require ETFs relying on the proposed 

rule to adopt and implement written 

policies and procedures that govern the 

construction of baskets and the process 

that will be used for the acceptance of 

basket assets.546 Additionally, to use 

custom baskets, an ETF would be 

required to adopt and implement 

written policies and procedures setting 

forth detailed parameters for the 

construction and acceptance of custom 

baskets that are in the best interests of 

the ETF and its shareholders.547 These 

policies and procedures also may 

include a periodic review requirement 

in order to ensure that the ETF’s custom 

basket procedures are being consistently 

followed.548 Finally, as discussed above, 

such an ETF would be required to 

maintain records detailing the 

composition of each custom basket. 

For purposes of this PRA analysis, we 

estimate that an ETF would incur a onetime average burden of 6 hours 

associated with setting up the process 

for documenting the construction and 

acceptance of baskets.549 Accordingly, 

we estimate that a total initial burden 

associated with setting up the process 

for documenting the construction and 

acceptance of baskets would be 9,810 

hours,550 at a time cost of $4,094,325.551

An ETF utilizing custom baskets would 

also incur a one-time average burden of 

20 hours associated with documenting 

and adopting the custom basket policies 

and procedures. Amortized over a 3- 

year period, this would be an annual 

burden per ETF of about 2 hours for 

documenting the construction and 

acceptance of baskets and an annual 

burden per ETF of about 6.7 hours for 

the custom basket policies and 

procedures. Accordingly, we estimate 

that a total burden for initial 

documentation and review of both the 

process for documenting the 

construction and acceptance of baskets 

as well as an ETF’s custom basket 

policies and procedures would be 

42,510 hours,552 at a time cost of 

$16,788,180.553 Amortizing these costs 

over three years, the annual burden of 

complying with these requirements 

would be 14,170 hours, at a time cost of 

$5,596,060. We also estimate that there 

would be no external cost for an ETF 

associated with these requirements. 

We estimate that each ETF would 

incur an ongoing burden of an 

additional 10 hours, at a time cost of an 

additional $3,985 554 each year to review 

and update its custom basket policies 

and procedures as well as its process for 

documenting the construction and 

acceptance of baskets. In aggregate, we 

estimate that the total ongoing costs 

associated with these requirements are 

16,350 hours, at a time cost of 

$6,515,475.555 We do not estimate that 

there will be any ongoing external costs 

associated with these requirements. 

Therefore, we estimate that the total 

initial and ongoing costs associated with 

complying with the policies and 

procedures requirements of proposed 

rule 6c–11 would be 30,520 556 hours at 

a time cost of $12,111,535.557

4. Estimated Total Burden 

We estimate that the total hour 

burdens and time costs associated with 

proposed rule 6c–11, including the 

burden associated with: (i) Website 

disclosure; (ii) recordkeeping; and (iii) 

developing policies and procedures, 

would result in an average aggregate 

annual burden of 60,440.5 hours 558 and 

an average aggregate time cost of 

$19,225,910.50.559 We also estimate that 

there are $1,089,972.75 external costs 

associated with this collection of 

information. 560 Therefore, to comply 

with rule 6c–11 each ETF would incur 

an annual burden of approximately 

36.97 561 hours, at an average time cost 

of approximately $11,758.97 562, and an 

external cost of $666.65.563


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564See Supporting Statement of Rule 0–2 under 

the Investment Company Act of 1940, General 

Requirements of Paper Applications (Nov. 23, 

2016), available at https://www.reginfo.gov/public/ 

do/PRAViewICR?ref_nbr=201602-3235-008 

(summarizing how applications are filed with the 

Commission in accordance with the requirements of 

rule 0–2). 

565This estimate is based on the last time the 

rule’s information collection was submitted for PRA 

renewal in 2016. 

566As discussed above, we expect to continue to 

receive applications for complex or novel ETF 

exemptive relief that are beyond the scope of the 

proposed rule. See supra at text following footnote 

454. 

567This estimate is based on the following 

calculation: 5,340 hours¥(5,340 hours × 0.3) = 

3,738 hours. 

568This estimate is based on the following 

calculation: $2,029,200.60¥($2,029,200.60 × 0.3) = 

$1,420,440.42. 

569This estimate is based on the following 

calculation: $14,090,000¥($14,090,000 × 0.3) = 

$9,863,000. 

570This estimate is based on the last time the 

form’s information collection was submitted for 

PRA renewal in 2017. 

571See proposed Instruction 5(e) to Item 3 of 

Form N–1A. 

572See proposed amendments to Item 3 of Form 

N–1A. 

573Proposed Instruction 5(e) to Item 3 of Form N– 

1A. 

574See supra footnotes 390–397 and 

accompanying text. 

575This estimate is based on the following 

calculation: 10 hours × $335.50 (blended rate for a 

compliance attorney ($352) and a senior 

programmer ($319)) = $3,355. 

576 Id. 

577This estimate is based on the following 

calculation: 5 hours × $335.50 (blended rate for a 

compliance attorney ($352) and a senior 

programmer ($319)) = $1,677.50. 

578The estimated burden associated with the 

amendments to Form N–1A accounts for the 

proposal to remove the information currently 

required by Item 11(g)(2) and Item 27(b)(7)(iv) of 

Form N–1A. 

579 Id. 

C. Rule 0–2 

Section 6(c) of the Act provides the 

Commission with authority to 

conditionally or unconditionally 

exempt persons, securities or 

transactions from any provision of the 

Act if and to the extent that such 

exemption is necessary or appropriate 

in the public interest and consistent 

with the protection of investors and the 

purposes fairly intended by the policy 

and provisions of the Act. Rule 0–2 

under the Act, entitled ‘‘General 

Requirements of Papers and 

Applications,’’ prescribes general 

instructions for filing an application 

seeking exemptive relief with the 

Commission.564 We currently estimate 

for rule 0–2 a total hour burden of 5,340 

hours at an annual time cost of 

$2,029,200.60 and the total annual 

external cost burden is $14,090,000.565

As discussed above, proposed rule 

6c–11 would permit ETFs that satisfy 

the conditions of the rule to operate 

without the need to obtain an exemptive 

order from the Commission under the 

Act. Therefore, proposed rule 6c–11 

would alleviate some of the burdens 

associated with rule 0–2 because it 

would reduce the number of entities 

that require exemptive relief in order to 

operate.566 Based on staff experience, 

we estimate that approximately onethird of the annual burdens associated 

with rule 0–2 are attributable to ETF 

applications. Therefore, we estimate 

that proposed rule 6c–11 would result 

in a decrease of the annual burden of 

rule 0–2 to approximately 3,738 567

hours at an annual time cost of 

$1,420,440.42 568 and an annual external 

cost of $9,863,000.569

D. Form N–1A 

Form N–1A is the registration form 

used by open-end management 

investment companies. The respondents 

to the proposed amendments to Form 

N–1A are open-end management 

investment companies registered or 

registering with the Commission. 

Compliance with the proposed 

disclosure requirements of Form N–1A 

is mandatory for open-end funds (to the 

extent applicable) including all ETFs 

organized as open-end funds. Responses 

to the disclosure requirements are not 

confidential. We currently estimate for 

Form N–1A a total burden hour of 

1,579,974 burden hours, with an 

estimated internal cost of $129,338,408, 

and external cost of $124,820,197.570

We are proposing amendments to 

Form N–1A designed to provide 

investors who purchase ETF shares in 

secondary market transactions with 

tailored information regarding ETFs, 

including information regarding costs 

associated with an investment in 

ETFs.571 Specifically, the proposed 

amendments to Form N–1A would 

require new disclosures regarding fees 

and expenses, such as brokerage 

commission and financial intermediary 

fees, and certain trading costs.572 In 

addition, we are proposing to include 

instructions in Form N–1A requiring an 

ETF to provide bid-ask spread 

information on the ETF’s website and an 

interactive calculator, in a clear and 

prominent format on the ETF’s website, 

to allow investors to customize certain 

hypothetical calculations to their 

specific investing situation.573

We also are proposing amendments to 

Form N–1A designed to eliminate 

certain disclosures for ETFs that are 

duplicative of the new disclosures we 

are proposing, discussed above, or are 

no longer necessary.574 These proposed 

amendments include eliminating certain 

disclosures in Item 6(c) of Form N–1A 

relating to creation units, secondary 

market transactions, premiums and 

discounts, as well as certain disclosures 

required of ETFs issuing creation units 

of less than 25,000 shares. Additionally, 

we are proposing to eliminate historical 

premium/discount disclosure 

requirements in Item 11(g)(2) and Item 

27(b)(7)(iv) of Form N–1A. 

Form N–1A generally imposes two 

types of reporting burdens on 

investment companies: (i) The burden of 

preparing and filing the initial 

registration statement; and (ii) the 

burden of preparing and filing posteffective amendments to a previously 

effective registration statement 

(including post-effective amendments 

filed pursuant to 17 CFR 230.485(a) or 

(b) (rule 485(a) or 485(b) under the 

Securities Act), as applicable). We 

estimate that each ETF would incur a 

one-time burden of an additional 10 

hours, at a time cost of an additional 

$3,355,575 to draft and finalize the 

required disclosure and amend its 

registration statement. We further 

estimate that an ETF would incur a onetime average burden of 10 hours 

associated with implementing the bidask spread disclosures and interactive 

calculator on its website, at a time cost 

of $3,355,576 as required by proposed 

Instruction 5(e) to Item 3. In the 

aggregate, we estimate that ETFs would 

incur a one-time burden of an additional 

20 hours, at a time cost of an additional 

$6,710 to comply with the proposed 

Form N–1A disclosure requirements for 

ETFs. Amortizing the one-time burden 

over a three-year period results in an 

average annual burden of an additional 

6.67 hours at a time cost of an 

additional $2,236.67. 

We estimate that each ETF would 

incur an ongoing burden of an 

additional 5 hours, at a time cost of an 

additional $1,677.50 577 each year to 

review and update the proposed 

disclosures.578 We also estimate that 

each ETF would incur an ongoing 

burden of an additional 5 hours, at a 

time cost of an additional $1,677.50,579

relating to the bid-ask spread 

disclosures and to maintain the 

interactive calculator on its website. In 

aggregate, we estimate that each ETF 

would incur an annual ongoing burden 

of an additional 10 hours, at a time cost 

of an additional $3,355, to comply with 

the proposed Form N–1A disclosure 

requirements. We do not estimate any 

change to the external costs associated 

with the proposed amendment for Form 

N–1A. 

In total, we estimate that ETFs, other 

than UIT ETFs, would incur an average 


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580This estimate is based on the following 

calculation: (6.7 hours + 10 hours) × 1,892 ETFs = 

31,596.4 hours. 

581This estimate is based on the following 

calculation: ($2,236.67 + $3,355) × 1,892 ETFs= 

$10,579,307.20. 

582See Form N–8B–2 [17 CFR 274.12]. 

583See Form S–6 [17 CFR 239.16]. Form S–6 is 

used for registration under the Securities Act of 

securities of any UIT registered under the Act on 

Form N–8B–2. 

584Form S–6 incorporates by reference the 

disclosure requirements of Form N–8B–2 and 

allows UITs to meet the filing and disclosure 

requirements of the Securities Act. 

585This estimate is based on the last time the 

form’s information collection was submitted for 

PRA renewal in 2014. 

586This estimate is based on the last time the 

form’s information collection was submitted for 

PRA renewal in 2018. 

587See proposed Items 13(h) and (i) of Form N– 

8B–2. See also supra section II.H.5. 

588See supra footnote 583. 

589This estimate is based on the following 

calculation: 20 hours × $335.50 (blended rate for a 

compliance attorney ($352) and a senior 

programmer ($319)) = $6,710. 

590Although we noted above that no new UIT 

ETFs have come to market since 2002, for purposes 

of calculating the time and cost burdens associated 

with completing Form N–8B–2, we estimate that 1 

UIT ETF will be created annually. See supra 

footnote 41 and accompanying text. 

591This estimate is based on the following 

calculation: 20 hours × 8 UIT ETFs= 160 hours. 

592This estimate is based on the following 

calculation: $6,710 × 8 UIT ETFs = $53,680. 

593This estimate is based on the following 

calculation: 10 hours × 8 UIT ETFs = 80 hours. 

594This estimate is based on the following 

calculation: $3,355 × 8 UIT ETFs = $26,840. 

595See Reporting Modernization Adopting 

Release, supra footnote 147. The compliance date 

for Form N–CEN is June 1, 2018. 596See proposed Item C.7.k. of Form N–CEN. 597See Reporting Modernization Adopting 

Release, supra footnote 147, at text accompanying 

n.1524. 

598See id., at text accompanying nn.1531–1532. 

599See id., at text accompanying nn.1533–1534. 

600See Reporting Modernization Adopting 

Release, supra footnote 147, at text accompanying 

n.1538. 

601This estimate stems from the Commission 

staff’s understanding of the time it takes to 

complete initially complete and review items on 

Form N–CEN. 

602This estimate is based on the following 

calculation: 0.1 hours × 1,635 ETFs = 163.5 hours. 

annual increased burden of 

approximately 31,596.4 hours,580 at a 

time cost of approximately 

$10,579,307.2,581 to comply with the 

proposed Form N–1A disclosure 

requirements. We do not estimate any 

change to the external costs associated 

with the proposed amendment for Form 

N–1A. 

E. Disclosure Amendments to Forms 

N–8B–2 and S–6 

Form N–8B–2 is used by UITs to 

initially register under the Investment 

Company Act pursuant to section 8 

thereof.582 UITs are required to file 

Form S–6 in order to register offerings 

of securities with the Commission under 

the Securities Act.583 As a result, UITs 

file Form N–8B–2 only once when the 

UIT is initially created and then use 

Form S–6 to file all post-effective 

amendments to their registration 

statements in order to update their 

prospectuses.584 We currently estimate 

for Form S–6 a total burden of 106,620 

hours, with an internal cost burden of 

approximately $34,000,000, and an 

external cost burden estimate of 

$67,359,556.585 Additionally, we 

currently estimate for Form N–8B–2 a 

total burden of 10 hours, with an 

internal cost burden of approximately 

$3,360, and an external burden estimate 

of $10,000.586

In order to assist investors with better 

understanding the total costs of 

investing in a UIT ETF, we are 

proposing disclosure requirements in 

Form N–8B–2 that mirror those 

disclosures proposed for Form N–1A.587

All UIT ETFs would be subject to these 

disclosure requirements. For existing 

UIT ETFs, the one-time and ongoing 

costs of complying with the 

amendments to Form N–8B–2 would 

accrue on Form S–6.588

For purposes of the PRA analysis, we 

estimate that each UIT ETF would incur 

a one-time burden of an additional 20 

hours, at a time cost of an additional 

$6,710 589 to draft and finalize the 

required disclosure and amend its Form 

S–6. For each newly created UIT ETF, 

these same costs would be incurred on 

Form N–8B–2.590 Therefore, in the 

aggregate, we estimate that existing UIT 

ETFs would incur a one-time burden of 

an additional 160 hours,591 at a time 

cost of an additional $53,680,592 to 

comply with the proposed Form N–8B– 

2 disclosure requirements on Form S–6. 

Additionally, in the aggregate, we 

estimate that newly created UIT ETFs 

would incur a one-time burden of an 

additional 20 hours, at a time cost of an 

additional $6,710, to comply with the 

proposed amendments and complete 

Form N–8B–2. Amortizing the one-time 

burden for both existing and newly 

created UIT ETFs over a three-year 

period results in an average annual 

burden of an additional 6.67 hours, at a 

time cost of an additional $2,236.67. 

We estimate that each UIT ETF would 

incur an ongoing burden of an 

additional 10 hours, at a time cost of an 

additional $3,355, each year to review 

and update the proposed disclosures on 

Form S–6. In aggregate, we estimate that 

UIT ETFs would incur an annual 

burden of an additional 80 hours,593 at 

a time cost of an additional $26,840,594

to comply with the proposed Form N– 

8B–2 disclosure requirements on Form 

S–6. 

Additionally, we estimate that newly 

created UIT ETFs would also incur an 

average annual increased burden of 

approximately 10 hours, at a time cost 

of an additional $3,355, to complete 

Form N–8B–2. We do not estimate any 

change to the external costs, on either 

Form N–8B–2 or Form S–6, associated 

with the proposed amendments to Form 

N–8B–2. 

F. Form N–CEN 

As discussed above, Form N–CEN is 

a structured form that requires 

registered funds to provide census-type 

information to the Commission on an 

annual basis.595 The Commission is 

proposing amendments to Form N–CEN 

to require ETFs to report if they are 

relying on rule 6c–11.596

In the Reporting Modernization 

Adopting Release, we estimated that the 

Commission would receive an average 

of 3,113 reports on Form N–CEN.597 We 

estimated that the average annual hour 

burden per response for Form N–CEN 

for the first year to be 32.37 hours and 

12.37 hours in subsequent years.598

Amortizing the burden over three years, 

we estimated that the average annual 

hour burden per fund per year to be 

19.04 hours and the total aggregate 

annual hour burden to be 59,272 

hours.599 Finally, we estimated that all 

applicable funds will incur, in the 

aggregate, external annual costs of 

$2,088,176 to prepare and file reports on 

Form N–CEN.600

Based on Commission staff 

experience, we believe that our proposal 

to require ETFs to report if they are 

relying on rule 6c–11 would increase 

the estimated burden hours associated 

with Form N–CEN by approximately 0.1 

hours, both initially and on an ongoing 

basis.601 Therefore, in the aggregate, we 

estimate that ETFs will incur an annual 

burden of an additional 163.5 hours to 

comply with the proposed amendments 

to Form N–CEN.602 We estimate that 

there are no additional external costs 

associated with this collection of 

information. 

G. Request for Comments 

We request comment on whether 

these estimates are reasonable. Pursuant 

to 44 U.S.C. 3506(c)(2)(B), the 

Commission solicits comments in order 

to: (i) Evaluate whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed 


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603See 5 U.S.C. 603(a). 

604 17 CFR 270.0–10(a). 

605This estimate is derived from an analysis of 

data reported on Form N–1A with the Commission 

for the period ending December, 2017. 

606This estimate is derived from an analysis of 

data reported on Forms S–6 and N–8B–2 with the 

Commission for the period ending December 2017. 

607See proposed rule 6c–11(c)(1)(iii) and (iv). 

608See supra section II.C.5.a. 

609Proposed rule 6c–11(c)(3). 

610Proposed rule 6c–11(c)(3). 

611See supra footnote 561 and accompanying 

text. 

collections of information; (iii) 

determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(iv) determine whether there are ways to 

minimize the burden of the collections 

of information on those who are to 

respond, including through the use of 

automated collection techniques or 

other forms of information technology. 

Persons wishing to submit comments 

on the collection of information 

requirements of the proposed rules and 

amendments should direct them to the 

OMB, Attention Desk Officer for the 

Securities and Exchange Commission, 

Office of Information and Regulatory 

Affairs, Washington, DC 20503, and 

should send a copy to, Brent J. Fields, 

Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090, with 

reference to File No. S7–15–18. OMB is 

required to make a decision concerning 

the collections of information between 

30 and 60 days after publication of this 

release; therefore a comment to OMB is 

best assured of having its full effect if 

OMB receives it within 30 days after 

publication of this release. Requests for 

materials submitted to OMB by the 

Commission with regard to these 

collections of information should be in 

writing, refer to File No. S7–15–18, and 

be submitted to the Securities and 

Exchange Commission, Office of FOIA 

Services, 100 F Street NE, Washington, 

DC 20549–2736. 

V. Initial Regulatory Flexibility 

Analysis 

The Commission has prepared the 

following Initial Regulatory Flexibility 

Analysis (‘‘IRFA’’) in accordance with 

section 3 of the Regulatory Flexibility 

Act 603 regarding our proposed new rule 

6c–11 and proposed amendments to 

Form N–1A, Form N–8b–2, and Form 

N–CEN. 

A. Reasons for and Objectives of the 

Proposed Actions 

As described more fully above, 

proposed rule 6c–11 would allow ETFs 

that meet the conditions of the rule to 

form and operate without the expense 

and delay of obtaining an exemptive 

order from the Commission. The 

Commission’s objective is to create a 

consistent, transparent and efficient 

regulatory framework for ETFs and to 

facilitate greater competition and 

innovation among ETFs. The 

Commission also believes the proposed 

disclosure amendments would provide 

useful information to investors who 

purchase and sell ETF shares in 

secondary markets. Finally, the goal of 

the proposed amendments to Form N– 

CEN is for the Commission to be able to 

better monitor reliance on rule 6c–11 

and to assist the Commission with its 

accounting, auditing and oversight 

functions. 

B. Legal Basis 

The Commission is proposing new 

rule 6c–11 pursuant to the authority set 

forth in sections 6(c), 22(c), and 38(a) of 

the Investment Company Act [15 U.S.C. 

80a–6(c), 22(c), and 80a–37(a)]. The 

Commission is proposing amendments 

to registration Form N–1A under the 

authority set forth in sections 6, 7(a), 10 

and 19(a) of the Securities Act of 1933 

[15 U.S.C. 77f, 77g(a), 77j, 77s(a)], and 

sections 8(b), 24(a), and 30 of the 

Investment Company Act [15 U.S.C. 

80a–8(b), 80a–24(a), and 80a–29]. The 

Commission is proposing amendments 

to registration Form N–8b–2 under the 

authority set forth in section 8(b) and 

38(a) of the Investment Company Act 

[15 U.S.C. 80a–8(b) and 80a–37(a)]. The 

Commission is proposing amendments 

to Form N–CEN under the authority set 

forth sections 8(b), 30(a), and 38(a) of 

the Investment Company Act [15 U.S.C. 

80a–8(b), 80a–29(a), and 80a–37(a)]. 

C. Small Entities Subject to the Rule 

An investment company is a small 

entity if, together with other investment 

companies in the same group of related 

investment companies, it has net assets 

of $50 million or less as of the end of 

its most recent fiscal year.604

Commission staff estimates that, as of 

December 2017, there are approximately 

8 open-end ETFs that may be 

considered small entities.605

Commission staff estimates there are no 

UIT ETFs that would be considered 

small entities subject to the proposed 

disclosures for Form N–8B–2.606

D. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

The proposed amendments would 

amend current reporting requirements 

for ETFs considered small entities. 

1. Rule 6c–11 

Proposed rule 6c–11 would require an 

ETF to disclose on its website: (i) 

Portfolio holding information and 

information regarding a published 

basket on each business day; (ii) the 

ETF’s current NAV per share, market 

price, and premium or discount, each as 

of the end of the prior business day; (iii) 

if an ETF’s premium or discount is 

greater than 2% for more than seven 

consecutive trading days, a discussion 

of the factors that are reasonably 

believed to have materially contributed 

to the premium or discount; and (iv) a 

table and line graph showing the ETF’s 

premiums and discounts.607 We also are 

proposing to require that ETFs preserve 

and maintain copies of all written 

authorized participant agreements, as 

well as records setting forth the 

following information for each basket 

exchanged with an authorized 

participant: (i) The names and 

quantities of the positions composing 

the basket; (ii) identification of the 

basket as a ‘‘custom basket’’ and a 

record stating that the custom basket 

complies with the ETF’s policies and 

procedures (if applicable); (iii) cash 

balancing amounts (if any); and (iv) the 

identity of the authorized participant 

conducting the transaction.608 Proposed 

rule 6c–11 would also require ETFs 

relying on the proposed rule to adopt 

and implement written policies and 

procedures that govern the construction 

of baskets and the process that will be 

used for the acceptance of basket 

assets.609 ETFs using custom baskets 

under the proposed rule must adopt 

custom basket policies and procedures 

that include certain enumerated 

requirements.610

We estimate that approximately 8 

ETFs are small entities that would 

comply with proposed rule 6c–11, and 

we do not believe that their costs would 

differ from other ETFs. As discussed 

above, we estimate that an ETF would 

incur an annual burden of 

approximately 36.97 hours, at an 

average time cost of approximately 

$11,758.97, and an external cost of 

$666.65.611

2. Disclosure and Reporting 

Requirements 

We are proposing amendments to 

Form N–1A and Form N–8B–2 designed 

to provide investors who purchase ETF 

shares in secondary market transactions 

with tailored information regarding 

ETFs, including information regarding 

costs associated with an investment in 

ETFs. Specifically, proposed 

amendments to Form N–1A would 

require new disclosure regarding fees 

and expenses, such a brokerage 


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612See supra footnote 572 and accompanying 

text. 

613Proposed Instruction 5(e) to Item 3 of Form N– 

1A. 

614See supra footnote 605. 

615See supra footnote 576 and accompanying 

text. 

616See supra footnote 576 and accompanying 

text. 617 Id. 

618See Reporting Modernization Adopting 

Release, supra footnote 147, at section V.E (noting 

that small entities currently follow the same 

requirements that large entities do when filing 

reports on Form N–SAR, Form N–CSR, and Form 

N–Q, and stating that the Commission believes that 

establishing different reporting requirements or 

frequency for small entities (including with respect 

to proposed Form N–PORT and proposed Form 

N–CEN) would not be consistent with the 

Commission’s goal of industry oversight and 

investor protection). 

commission and financial intermediary 

fees, and additional information on 

certain trading costs.612 In addition, we 

are proposing to include instructions in 

Form N–1A requiring an ETF to provide 

bid-ask spread information on the ETF’s 

website and an interactive calculator, in 

a clear and prominent format on the 

ETF’s website, to allow investors to 

customize certain hypothetical 

calculations to their specific investing 

situation.613 Proposed amendments to 

Form N–8B–2 mirror proposed 

disclosures for Form N–1A. We are also 

proposing amendments to Form N–CEN 

that would require ETFs to report on 

Form N–CEN if they are relying on rule 

6c–11. The proposed Form N–CEN 

amendments are designed to assist us 

with monitoring reliance on rule 6c–11 

as well with our accounting, auditing 

and oversight functions, including 

compliance with the PRA. 

All ETFs would be subject to the 

proposed disclosure and reporting 

requirements, including ETFs that are 

small entities. We estimate that 8 ETFs 

are small entities that would be required 

to comply with the proposed disclosure 

and reporting requirements.614

As discussed above, we estimate that 

each ETF, including ETFs that are small 

entities, would incur a one-time burden 

of an additional 10 hours, at a time cost 

of an additional $3,355 to draft and 

finalize the required disclosure and 

amend its registration statement.615 We 

further estimate that ETFs, including 

ETFs that are small entities, would 

incur a one-time average burden of 10 

hours associated with implementing the 

interactive calculator on its website, at 

a time cost of $3,355, as required by 

proposed Instruction 5(e) to Item 3. In 

the aggregate, we estimate that ETFs, 

including ETFs that are small entities, 

would incur a one-time burden of an 

additional 20 hours, at a time cost of an 

additional $6,710, to comply with the 

proposed Form N–1A disclosure 

requirements for ETFs.616

We also estimate that each ETF, 

including ETFs that are small entities, 

would incur an ongoing burden of an 

additional 5 hours, at a time cost of an 

additional $1,677.50, each year to 

review and update the proposed 

disclosures. We further estimate that 

each ETF, including ETFs that are small 

entities, would incur an ongoing burden 

of an additional 5 hours, at a time cost 

of an additional $1,677.50, to maintain 

the interactive calculator on its website. 

In aggregate, we estimate that each ETF, 

including ETFs that are small entities, 

would incur an annual ongoing burden 

of an additional 10 hours, at a time cost 

of an additional $3,355, to comply with 

the proposed Form N–1A disclosure 

requirements. We do not estimate any 

change to the external costs associated 

with the proposed amendments to Form 

N–1A.617

As discussed above, because the 

amendments made to Form N–8B–2 

mirror those made on Form N–1A, we 

believe that UIT ETFs, including UIT 

ETFs that are small entities, would 

incur the same costs as all ETFs 

associated with updating their 

registration statements. However, none 

of the UIT ETFs are small entities. 

E. Duplicative, Overlapping or 

Conflicting Federal Rules 

Commission staff has not identified 

any federal rules that duplicate, overlap, 

or conflict with the proposed 

regulations. 

F. Significant Alternatives 

The RFA directs the Commission to 

consider significant alternatives that 

would accomplish our stated objectives, 

while minimizing any significant 

economic impact on small entities. We 

considered the following alternatives for 

small entities in relation to the proposed 

regulations: 

• Exempting ETFs that are small 

entities from the proposed disclosure, 

reporting or recordkeeping 

requirements, to account for resources 

available to small entities; 

• establishing different disclosure, 

reporting or recordkeeping requirements 

or different frequency of these 

requirements, to account for resources 

available to small entities; 

• clarifying, consolidating, or 

simplifying the compliance 

requirements under the amendments for 

small entities; and 

• using performance rather than 

design standards. 

We do not believe that exempting any 

subset of ETFs, including small entities, 

from proposed rule 6c–11 or proposed 

form amendments would permit us to 

achieve our stated objectives. Nor do we 

believe establishing different disclosure, 

reporting or recordkeeping requirements 

or different frequency of these 

requirements for small entities would 

permit us to achieve our stated 

objectives. Similarly, we do not believe 

that we can establish simplified or 

consolidated compliance requirements 

for small entities under the proposed 

rule without compromising our 

objectives. As discussed above, the 

conditions necessary to rely on 

proposed rule 6c–11 and the reporting, 

recordkeeping and disclosure 

requirements are designed to provide 

investor protection benefits, including, 

among other things, tailored information 

regarding ETFs, including information 

regarding costs associated with an 

investment in ETFs. These benefits 

should apply to investors in smaller 

funds as well as investors in larger 

funds. Similarly, we do not believe it 

would be in the interest of investors to 

exempt small ETFs from the proposed 

disclosure and reporting requirements 

or to exempt small ETFs from the 

proposed recordkeeping requirements. 

We believe that all ETF investors, 

including investors in small ETFs, 

would benefit from disclosure and 

reporting requirements that permit them 

to make investment choices that better 

match their risk tolerances. We further 

note that the current disclosure 

requirements for reports on Form N–1A 

and Form N–8B–2 do not distinguish 

between small entities and other 

funds.618

Finally, we believe that proposed rule 

6c–11 and related disclosure and 

reporting requirements appropriately 

use a combination of performance and 

design standards. Proposed rule 6c–11 

provides ETFs that satisfy the 

requirements of the rule with 

exemptions from certain provisions of 

the Act necessary for ETFs to operate. 

Because the provisions of the Act from 

which ETFs would be exempt provide 

important investor and market 

protections, the conditions of the 

proposed rule must be specifically 

designed to ensure that these investor 

and market protections are maintained. 

However, where we believe that 

flexibility is beneficial, we proposed 

performance-based standards that 

provide a regulatory framework, rather 

than prescriptive requirements, to give 

funds the opportunity to adopt policies 

and procedures tailored to their specific 


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619See e.g., supra section II.C.5 (noting that 

proposed rule 6c–11 would provide an ETF with 

the flexibility to use ‘‘custom baskets’’ if the ETF 

has adopted written policies and procedures that 

set forth detailed parameters for the construction 

and acceptance of custom baskets that are in the 

best interests of the ETF and its shareholders). 

620Public Law 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

needs without raising investor or market 

protection concerns.619

G. General Request for Comment 

The Commission requests comment 

regarding this analysis. We request 

comments on the number of small 

entities that would be subject to the 

proposed ETF regulations and whether 

the proposed ETF regulations would 

have any effects that have not been 

discussed. We request that commenters 

describe the nature of any effects on 

small entities subject to the proposed 

ETF regulations and provide empirical 

data to support the nature and extent of 

such effects. We also request comment 

on the estimated compliance burdens of 

the proposed ETF regulations and how 

they would affect small entities. 

VI. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 620 the Commission 

must advise OMB whether a proposed 

regulation constitutes a ‘‘major’’ rule. 

Under SBREFA, a rule is considered 

‘‘major’’ where, if adopted, it results in 

or is likely to result in: 

• An annual effect on the economy of 

$100 million or more; 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• Significant adverse effects on 

competition, investment or innovation. 

We request comment on whether our 

proposal would be a ‘‘major rule’’ for 

purposes of SBREFA. We solicit 

comment and empirical data on: 

• The potential effect on the U.S. 

economy on an annual basis; 

• Any potential increase in costs or 

prices for consumers or individual 

industries; and 

• Any potential effect on competition, 

investment, or innovation. 

Commenters are requested to provide 

empirical data and other factual support 

for their views to the extent possible. 

VII. Statutory Authority 

The Commission is proposing new 

rule 6c–11 pursuant to the authority set 

forth in sections 6(c), 22(c), and 38(a) of 

the Investment Company Act [15 U.S.C. 

80a–6(c), 80a–22(c), and 80a–37(a)]. The 

Commission is proposing amendments 

to registration Form N–1A under the 

authority set forth in sections 6, 7(a), 10 

and 19(a) of the Securities Act of 1933 

[15 U.S.C. 77f, 77g(a), 77j, 77s(a)], and 

sections 8(b), 24(a), and 30 of the 

Investment Company Act [15 U.S.C. 

80a–8(b), 80a–24(a), and 80a–29]. The 

Commission is proposing amendments 

to registration Form N–8B–2 under the 

authority set forth in section 8(b) and 

38(a) of the Investment Company Act 

[15 U.S.C. 80a–8(b) and 80a–37(a)]. The 

Commission is proposing amendments 

to Form N–CEN under the authority set 

forth in sections 8(b), 30(a), and 38(a) of 

the Investment Company Act [15 U.S.C. 

80a–8(b), 80a–29(a), and 80a–37(a)]. 

List of Subjects 

17 CFR Part 239 

Reporting and recordkeeping 

requirements, Securities. 

17 CFR Parts 270 and 274 

Investment companies, Reporting and 

recordkeeping requirements, Securities. 

Text of Proposed Rules and Form 

Amendments 

For reasons set out in the preamble, 

title 17, chapter II of the Code of Federal 

Regulations is proposed to be amended 

as follows: 

PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

■ 1. The authority citation for part 239 

continues to read, in part, as follows: 

Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 

77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, 

78o(d), 78o–7 note, 78u–5, 78w(a), 78ll, 

78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a– 

10, 80a–13, 80a–24, 80a–26, 80a–29, 80a–30, 

and 80a–37; and sec. 107 Pub. L. 112–106, 

126 Stat. 312, unless otherwise noted. 

* * * * * 

PART 270—RULES AND 

REGULATIONS, INVESTMENT 

COMPANY ACT OF 1940 

■ 2. The authority citation for part 270 

continues to read, in part, and is 

amended by adding a sectional 

authority for § 270.6c–11 to read as 

follows: 

Authority: 15 U.S.C. 80a–1 et seq., 80a– 

34(d), 80a–37, 80a–39, and Pub. L. 111–203, 

sec. 939A, 124 Stat. 1376 (2010), unless 

otherwise noted. 

* * * * * 

Section 270.6c–11 is also issued under 15 

U.S.C. 80a–6(c) and 80a–37(a). 

* * * * * 

■ 3. Section 270.6c–11 is added to read 

as follows: 

§ 270.6c–11 Exchange-traded funds. 

(a) Definitions. For purposes of this 

section: 

Authorized participant means a 

member or participant of a clearing 

agency registered with the Commission, 

which has a written agreement with the 

exchange-traded fund or one of its 

service providers that allows the 

authorized participant to place orders 

for the purchase and redemption of 

creation units. 

Basket means the securities, assets or 

other positions in exchange for which 

an exchange-traded fund issues (or in 

return for which it redeems) creation 

units. 

Business day means any day the 

exchange-traded fund is open for 

business, including any day when it 

satisfies redemption requests as 

required by section 22(e) of the Act (15 

U.S.C. 80a–22(e)). 

Cash balancing amount means an 

amount of cash to account for any 

difference between the value of the 

basket and the net asset value of a 

creation unit. 

Creation unit means a specified 

number of exchange-traded fund shares 

that the exchange-traded fund will issue 

to (or redeem from) an authorized 

participant in exchange for the deposit 

(or delivery) of a basket and a cash 

balancing amount if any. 

Custom basket means: 

(i) Baskets that are composed of a 

non-representative selection of the 

exchange-traded fund’s portfolio 

holdings; or 

(ii) Different baskets used in 

transactions on the same business day. 

Exchange-traded fund means a 

registered open-end management 

company: 

(i) That issues (and redeems) creation 

units to (and from) authorized 

participants in exchange for a basket 

and a cash balancing amount if any; and 

(ii) Whose shares are listed on a 

national securities exchange and traded 

at market-determined prices. 

Exchange-traded fund share means a 

share of stock issued by an exchangetraded fund. 

Foreign investment means any 

security, asset or other position of the 

ETF issued by a foreign issuer as that 

term is defined in § 240.3b–4 of this 

title, and for which there is no 

established United States public trading 

market, as that term is used in 17 CFR 

227.201 (Item 201 of Regulation S–K 

under the Securities Act of 1933). 

Market price means: 

(i) The official closing price of an 

exchange-traded fund share; or 

(ii) If it more accurately reflects the 

market value of an exchange-traded 


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fund share at the time as of which the 

exchange-traded fund calculates current 

net asset value per share, the price that 

is the midpoint between the national 

best bid and national best offer as of that 

time. 

National securities exchange means 

an exchange that is registered with the 

Commission under section 6 of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78f). 

Portfolio holdings means the 

securities, assets or other positions held 

by the exchange-traded fund. 

Premium or discount means the 

positive or negative difference between 

the market price of an exchange-traded 

fund share at the time as of which the 

current net asset value is calculated and 

the exchange-traded fund’s current net 

asset value per share, expressed as a 

percentage of the exchange-traded fund 

share’s current net asset value per share. 

(b) Application of the Act to 

Exchange-Traded Funds. If the 

conditions of paragraph (c) of this 

section are satisfied: 

(1) Redeemable security. An 

exchange-traded fund share is 

considered a ‘‘redeemable security’’ 

within the meaning of section 2(a)(32) of 

the Act (15 U.S.C. 80a–2(a)(32)). 

(2) Pricing. A dealer in exchangetraded fund shares is exempt from 

section 22(d) of the Act (15 U.S.C. 80a– 

22(d)) and § 270.22c–1(a) with regard to 

purchases, sales and repurchases of 

exchange-traded fund shares at marketdetermined prices. 

(3) Affiliated transactions. (i) A 

person who is an affiliated person of an 

exchange-traded fund (or who is an 

affiliated person of such a person) solely 

by reason of the circumstances 

described in paragraphs (b)(3)(i)(A) and 

(B) of this section is exempt from 

sections 17(a)(1) and 17(a)(2) of the Act 

(15 U.S.C. 80a–17(a)(1) and (a)(2)) with 

regard to the deposit and receipt of 

baskets: 

(A) Holding with the power to vote 

5% or more of the exchange-traded 

fund’s shares; or 

(B) Holding with the power to vote 

5% or more of any investment company 

that is an affiliated person of the 

exchange-traded fund. 

(4) Postponement of redemptions. If 

an exchange-traded fund includes a 

foreign investment in its basket, and if 

a local market holiday, or series of 

consecutive holidays, or the extended 

delivery cycles for transferring foreign 

investments to redeeming authorized 

participants prevents timely delivery of 

the foreign investment in response to a 

redemption request, the exchangetraded fund is exempt, with respect to 

the delivery of the foreign investment, 

from the prohibition in section 22(e) of 

the Act (15 U.S.C. 80a–22(e)) against 

postponing the date of satisfaction upon 

redemption for more than seven days 

after the tender of a redeemable security 

if the exchange-traded fund delivers the 

foreign investment as soon as 

practicable, but in no event later than 15 

days after the tender of the exchangetraded fund shares. The exemption 

provided in paragraph (b)(4) of this 

section will expire and no longer be 

effective on [date ten years from 

effective date of rule]. 

(c) Conditions. (1) Each business day, 

an exchange-traded fund must disclose 

prominently on its website, which is 

publicly available and free of charge: 

(i) Before the opening of regular 

trading on the primary listing exchange 

of the exchange-traded fund shares and 

before the exchange-traded fund starts 

accepting orders for the purchase or 

redemption of creation units: 

(A) The portfolio holdings that will 

form the basis of the next calculation of 

current net asset value per share; 

(B) A basket applicable to orders for 

the purchase or redemption of creation 

units to be priced based on the next 

calculation of current net asset value; 

and 

(C) The estimated cash balancing 

amount, if any; 

(ii) The exchange-traded fund’s 

current net asset value per share, market 

price, and premium or discount, each as 

of the prior business day; 

(iii) A table showing the number of 

days the exchange-traded fund’s shares 

traded at a premium or discount during 

the most recently completed calendar 

year and the most recently completed 

calendar quarters since that year (or the 

life of the exchange-traded fund, if 

shorter); 

(iv) A line graph showing exchangetraded fund share premiums or 

discounts for the most recently 

completed calendar year and the most 

recently completed calendar quarters 

since that year (or the life of the 

exchange-traded fund, if shorter); and 

(v) If the exchange-traded fund’s 

premium or discount is greater than 2% 

for more than seven consecutive trading 

days, a discussion of the factors that are 

reasonably believed to have materially 

contributed to the premium or discount, 

which must be maintained on the 

website for at least one year thereafter; 

and 

(vi) The exchange-traded fund must 

present the description, amount, value 

and unrealized gain/loss in the manner 

prescribed within 17 CFR 210.12–12, 

210.12–12A, 210.12–13, 210.12–13A, 

210.12–13B, 210.12–13C, and 210.12– 

13D (Article 12 of Regulation S–X) for 

each portfolio holding or basket asset 

required to be disclosed pursuant to 

paragraphs (c)(1)(i) of this section. 

(2) An exchange-traded fund must 

reflect changes in the exchange-traded 

fund’s portfolio holdings in the first 

calculation of net asset value per share 

on the first business day following the 

trade date. 

(3) An exchange-traded fund must 

adopt and implement written policies 

and procedures that govern the 

construction of baskets and the process 

that will be used for the acceptance of 

baskets; provided, however, if the 

exchange-traded fund utilizes a custom 

basket: 

(i) These written policies and 

procedures also must: 

(A) Set forth detailed parameters for 

the construction and acceptance of 

custom baskets that are in the best 

interests of the exchange-traded fund 

and its shareholders, including the 

process for any revisions to, or 

deviations from, those parameters; and 

(B) Specify the titles or roles of the 

employees of the exchange-traded 

fund’s investment adviser who are 

required to review each custom basket 

for compliance with those parameters. 

(4) The exchange-traded fund may not 

seek, directly or indirectly, to provide 

returns that exceed the performance of 

a market index by a specified multiple, 

or to provide returns that have an 

inverse relationship to the performance 

of a market index, over a fixed period 

of time. 

(5) Notwithstanding the definition of 

exchange-traded fund in paragraph (a) 

of this section, an exchange-traded fund 

is not prohibited from selling (or 

redeeming) individual shares on the day 

of consummation of a reorganization, 

merger, conversion or liquidation. 

(d) Recordkeeping. The exchangetraded fund must maintain and preserve 

for a period of not less than five years, 

the first two years in an easily accessible 

place: 

(1) All written agreements (or copies 

thereof) between an authorized 

participant and the exchange-traded 

fund or one of its service providers that 

allows the authorized participant to 

place orders for the purchase or 

redemption of creation units; 

(2) For each basket exchanged with an 

authorized participant, records setting 

forth: 

(i) The names and quantities of the 

positions composing the basket 

exchanged for creation units; 

(ii) If applicable, identification of the 

basket as a custom basket and a record 

stating that the custom basket complies 

with policies and procedures that the 


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37406 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

exchange-traded fund adopted pursuant 

to paragraph (c)(3)(i) of this section; 

(iii) Cash balancing amount, if any; 

and 

(iv) Identity of authorized participant 

transacting with the exchange-traded 

fund. 

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940 

■ 4. The general authority citation for 

part 274 continues to read, in part, as 

follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 

77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 

80a–24, 80a–26, 80a–29, and Pub. L. 111– 

203, sec. 939A, 124 Stat. 1376 (2010), unless 

otherwise noted. 

* * * * * 

■ 5. Form N–1A (referenced in 

§§ 239.15A and 274.11A) is amended as 

follows: 

■ a. In General Instruction A revise the 

definition of ‘‘Exchange-Traded Fund.’’ 

■ b. In General Instruction A, remove 

the definition of ‘‘Market Price.’’ 

The additions and revisions read as 

follows: 

Note: The text of Form N–1A does 

not, and this amendment will not, 

appear in the Code of Federal 

Regulations. 

Form N–1A 

* * * * * 

GENERAL INSTRUCTIONS 

* * * * * 

A. Definitions 

* * * * * 

‘‘Exchange-Traded Fund’’ means a 

Fund or Class, the shares of which are 

listed and traded on a national 

securities exchange, and that has formed 

and operates under an exemptive order 

granted by the Commission or in 

reliance on rule 6c–11 [17 CFR 270.6c– 

11] under the Investment Company Act. 

* * * * * 

■ 6. Amend Item 3 of Form N–1A to 

read as follows: 

BILLING CODE 8011–01–P 


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Item 3. Risk/Return Summary: Fee Table 

Include the following information, in plain English under rule 42l(d) under the Securities Act, 

after Item 2: 

Fees and Expenses of the Fund 

This table describes the fees and expenses that you may pay if you buy, hold and sell 

shares of the Fund. You may pay other fees not described below, such as brokerage commissions 

and other fees to financial intermediaries, which are not reflected in the tables and examples 

below. You may qualify for sales charge discounts if you and your family invest, or agree to 

invest in the future, at least $[ ] in [name of fund family] funds. More information about 

these and other discounts is available from your financial intermediary and in [identify section 

heading and page number] of the Fund's prospectus and [identify section heading and page 

number] of the Fund's statement of additional information. 

Shareholder Fees (fees paid directly from your investment) 

Maximum Sales Charge (Load) Imposed on Purchases 

(as a percentage of offering price) 

Maximum Deferred Sales Charge (Load) 

(as a percentage ) 

Maximum Sales Charge (Load) Imposed on Reinvested Dividends 

[and other Distributions] (as a percentage of _____ ) 

Redemption Fee (as a percentage of amount redeemed, if applicable) 

Exchange Fee 

Maximum Account Fee 

% ---

% ---% ---

% ---% ---

__ % 

Annual Fund Operating Expenses (expenses that you pay each year as a percentage of 

the value of your investment) 

Management Fees 

Distribution [and/or Service] (12b-l) Fees 

Other Expenses 

Total Annual Fund Operating Expenses 

% ---

% ---% ---

% ---% ---

% ---
37408 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 


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Example 

This Example is intended to help you compare the cost of investing in the Fund with the 

cost of investing in other mutual funds. 

The Example assumes that you invest $10,000 in the Fund for the time periods indicated 

and then redeem all ofyour shares at the end of those periods. The Example also assumes that 

your investment has a 5% return each year and that the Fund's operating expenses remain the 

same. 

1 year 3 years 5 years 10 years 

Although your actual costs may be higher $ $ $ $ or lower, oased on these assumptions your 

costs would be: 

You would pay the following expenses if $ $ $ $ 

you did not redeem your shares: 

The Example above does not reflect sales charges (loads) on reinvested dividends [and 

other distributions]. If these sales charges (loads) were included, your costs would be higher. 

Exchange-Traded Fund Trading Information and Related Costs 

What information do I need to know about how the Exchange-Traded Fund ("ETF'J 

trades? 

Individual shares of an ETF may only be bought and sold in the secondary market 

through a broker or dealer at a market price. The market price can change throughout the day due 

to the supply of and demand for ETF shares, and changes in the value of the Fund's underlying 

investments, among other reasons. Because ETF shares trade at market prices rather than net 

asset value, shares may trade at a price greater than net asset value (premium) or less than net 

asset value (discount). 

What costs are associated with trading shares of an ETF? 

An investor may incur costs when buying or selling shares on an exchange that are in 

addition to the costs described above. Examples include brokerage commissions, costs 

attributable to the bid-ask spread, and costs attributable to premiums and discounts. 

What is the bid-ask spread? 

The bid-ask spread is the difference between the highest price a buyer is willing to pay to 

purchase shares of the Fund (bid) and the lowest price a seller is willing to accept for shares of 

the Fund (ask). The bid-ask spread can change throughout the day due to the supply of or 

demand for ETF shares, the quantity of shares traded, and the time of day the trade is executed, 
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37409 

BILLING CODE 8011–01–C 

* * * * * 

■ 7. Amend Instruction 1 of Item 3 of 

Form N–1A as follows: 

* * * * * 

Instructions 

1. General 

(a) Round all dollar figures to the 

nearest dollar and all percentages to the 

nearest hundredth of 1%. 

(b) Include the narrative explanations 

in the order indicated. A Fund may 

modify the narrative explanations if the 

explanation contains comparable 

information to that shown. The 

narrative explanation regarding sales 

charge discounts is only required by a 

Fund that offers such discounts and 

should specify the minimum level of 

investment required to qualify for a 

discount as disclosed in the table 

required by Item 12(a)(1). 

(c) Include the caption ‘‘Maximum 

Account Fees’’ only if the Fund charges 

these fees. A Fund may omit other 

captions if the Fund does not charge the 

fees or expenses covered by the 

captions. 

(d) 

(i) If the Fund is a Feeder Fund, 

reflect the aggregate expenses of the 

Feeder Fund and the Master Fund in a 

single fee table using the captions 

provided. In a footnote to the fee table, 

state that the table and Example reflect 

the expenses of both the Feeder and 

Master Funds. 

(ii) If the prospectus offers more than 

one Class of a Multiple Class Fund or 

more than one Feeder Fund that invests 

in the same Master Fund, provide a 

separate response for each Class or 

Feeder Fund. 


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37410 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

(e) If the Fund is an Exchange-Traded 

Fund, exclude any fees charged for the 

purchase and redemption of the Fund’s 

creation units. 

* * * * * 

■ 8. Amend Instruction 5 of Item 3 of 

Form N–1A to read as follows: 

* * * * * 

5. Exchange-Traded Fund Trading 

Information and Related Costs. 

(a) Include the median bid-ask spread 

for the Fund’s most recent fiscal year 

only if the Fund is an Exchange-Traded 

Fund. However, do not include the 

median bid-ask spread for any 

Exchange-Traded Fund that had its 

initial listing on a national securities 

exchange after the beginning of the most 

recently completed fiscal year. For an 

Exchange-Traded Fund that had an 

initial listing after the beginning of the 

most recently completed fiscal year, 

explain that the Exchange-Traded Fund 

did not have a sufficient trading history 

to report trading information and related 

costs. Information should be based on 

the most recently completed fiscal year 

end. The Fund also must provide 

information on the Fund’s website, 

which is publicly accessible, free of 

charge, that investors can use to obtain 

the bid/ask spread information required 

in this Item. 

(b) Bid-Ask Spread (Median). 

Calculate the median bid-ask spread by 

dividing the difference between the ask 

and the bid by the midpoint of the ask 

and the bid for each ten-second interval 

throughout each trading day of the 

Exchange-Traded Fund’s most recent 

fiscal year. Once the bid-ask spread for 

each ten-second interval throughout the 

fiscal year is determined, sort the 

spreads from lowest to highest. If there 

is an odd number of spread intervals, 

then the median is the middle number. 

If there is an even number of spread 

intervals, then the median is the average 

between the two middle numbers. 

Express the spread as a percentage, 

rounded to the nearest hundredth 

percent. 

(c) Determine the mid-range spread 

cost for each number of transactions in 

the table according to the following 

formula: 

(SMid/2) * $10,000 * T 

Where: 

SMid = Median spread as calculated in 

Instruction 5(b) during most recently 

completed calendar year, expressed as a 

percentage; 

T = Number of Transactions (1 and 25). 

(d) Determine the high-end spread 

cost for each number of transactions in 

the table according to the following 

formula: 

(SHigh/2) * $10,000 * T 

Where: 

SHigh = High-end spread is calculated by 

dividing the difference between the ask 

and the bid by the midpoint of the ask 

and the bid for each ten-second interval 

throughout each trading day of the 

Exchange-Traded Fund’s most recently 

completed fiscal year. Once the bid-ask 

spread for each ten-second interval 

throughout the fiscal year is determined, 

sort the spreads from lowest to highest. 

The high end spread is the number 

closest to the 95th percentile, expressed 

as a percentage. If two numbers are 

equally close to the 95th percentile, use 

the average of the two numbers; 

T = Number of Transactions (1 and 25). 

(e) Provide an interactive calculator in 

a clear and prominent format on the 

Fund website which uses the 

calculations in Instructions 5(a)–(d) to 

Item 3 to provide the information 

required by Q&As 3, 4 and 5. 

* * * * * 

■ 9. Amend Item 6 of Form N–1A as 

follows: 

* * * * * 

Item 6. Purchase and Sale of Fund 

Shares 

(a) Purchase of Fund Shares. Disclose 

the Fund’s minimum initial or 

subsequent investment requirements. 

(b) Sale of Fund Shares. Also disclose 

that the Fund’s shares are redeemable 

and briefly identify the procedures for 

redeeming shares (e.g., on any business 

day by written request, telephone, or 

wire transfer). 

(c) Exchange-Traded Funds. If the 

Fund is an Exchange-Traded Fund, the 

Fund may omit the information required 

by this Item. 

* * * * * 

■ 10. Amend Items 11(a)(1) and 11(g) of 

Form N–1A as follows: 

* * * * * 

Item 11. Shareholder Information 

(a) Pricing of Fund Shares. Describe 

the procedures for pricing the Fund’s 

shares, including: 

(1) An explanation that the price of 

Fund shares is based on the Fund’s net 

asset value and the method used to 

value Fund shares (market price, fair 

value, or amortized cost); except that if 

the Fund is an Exchange-Traded Fund, 

an explanation that the price of Fund 

shares is based on a market price. 

* * * * * 

(g) Exchange-Traded Funds. If the 

Fund is an Exchange-Traded Fund, the 

Fund may omit from the prospectus the 

information required by Items 11(a)(2), 

(b), and (c). 

* * * * * 

■ 11. Remove Item 27(b)(7)(iv) of Form 

N–1A and instructions thereto. 

■ 12. Amend Instruction 1(e)(ii) of Item 

27(d)(1) of Form N–1A as follows: 

* * * * * 

Instructions 

* * * * * 

1. General. 

* * * * * 

(e) If the fund is an Exchange-Traded 

Fund: 

* * * * * 

(ii) Exclude any fees charged for the 

purchase and redemption of the Fund’s 

creation units. 

* * * * * 

■ 13. Amend Form N–8B–2 (referenced 

in §§ 239.16 and 274.12) as follows: 

The additions and revisions read as 

follows: 

Note: The text of Form N–8B–2 does 

not, and this amendment will not, 

appear in the Code of Federal 

Regulations. 

Form N–8B–2 

* * * * * 

GENERAL INSTRUCTIONS FOR FORM 

N–8B–2 

* * * * * 

Definitions 

* * * * * 

Exchange-Traded Fund (ETF): The 

term ‘‘Exchange-Traded Fund’’ or 

‘‘ETF’’ means a trust, the shares of 

which are listed and traded on a 

national securities exchange, and that 

has formed and operates under an 

exemptive order granted by the 

Commission. 

* * * * * 

Information Concerning Loads, Fees, 

Charges, and Expenses 

13. 

* * * * * 

(h) If the trust is an Exchange-Traded 

Fund, furnish an explanation indicating 

that an ETF investor may pay additional 

fees not described by any other item in 

this form, such as brokerage 

commissions and other fees to financial 

intermediaries. 

(i) If the trust is an Exchange-Traded 

Fund, furnish the disclosures and 

information set forth in Item 3 of Form 

N–1A [referenced in 17 CFR 274.11A], 

in the section of that Item titled 

‘‘Exchange-Traded Fund Trading 

Information and Related Costs.’’ Provide 

information specific to the trust as 

necessary, utilizing the ETF-specific 

methodology set forth in the 

Instructions to Form N–1A Item 3. 

* * * * * 

■ 14. Amend Items C.7. and E.2. Form 

N–CEN (referenced in § 274.101): 


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Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37411 

The additions read as follows: 

Note: The text of Form N–CEN does 

not, and this amendment will not, 

appear in the Code of Federal 

Regulations. 

FORM N–CEN 

ANNUAL REPORT FOR REGISTERED 

INVESTMENT COMPANIES 

* * * * * 

Part C. Additional Questions for 

Management Investment Companies 

* * * * * 

Item C.7. 

* * * * * 

k. Rule 6(c)–11 (17 CFR 270.6c–11): 

lll 

* * * * * 

Part E. Additional Questions for 

Exchange-Traded Funds and ExchangeTraded Managed Funds 

* * * * * 

Item E.2. 

* * * * * 

Instruction. The term ‘‘authorized 

participant’’ means a member or 

participant of a clearing agency 

registered with the Commission, which 

has a written agreement with the 

Exchange-Traded Fund or ExchangeTraded Managed Fund or one of its 

service providers that allows the 

authorized participant to place orders 

for the purchase and redemption of 

creation units. 

* * * * * 

By the Commission. 

Dated: June 28, 2018. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2018–14370 Filed 7–30–18; 8:45 am] 

BILLING CODE 8011–01–P 


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