Will Clayton and Co Open the ETF Floodgates?
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Thursday, June 28, 2018

Will Clayton and Co Open the ETF Floodgates?

Don't look now, but Jay Clayton and his colleagues may be about to dramatically shake up the ETF business by making it easier to enter.

This morning the commissioners of the Securities and Exchange Commission (SEC) will meet and consider a proposal to allow the launch of new ETFs without advance SEC permission, within certain parameters. Bloomberg picked up on the proposal, which is one of several issues to be addressed at today's open meeting of the commission at its headquarters in Washington, D.C.

Here's the SEC's description:
The Commission will consider whether to propose rule 6c-11 under the Investment Company Act of 1940 that would permit exchange-traded funds that satisfy certain conditions to operate without first obtaining an exemptive order from the Commission, as well as related form amendments.

As it stands, ETFs violate certain basic mutual fund rules in the '40 Act, so firms entering the ETF space for the first time (or launching ETFs that are substantially different from their prior ones) currently have to submit exemptive relief requests to the SEC, in advance, to get permission to launch their ETFs. That approval process slows down the ETF launch process, especially for new entrants, creating a kind of barrier to entry.

This proposal could change all that, removing a substantial barrier to entry for new ETF entrants who aren't looking to launch anything too exotic. Of course, the ETF business is pretty concentrated and the indexing side (the bulk of the AUM currently) is a scale game with some very large players already dominating, so perhaps the non-exotic side of the business isn't where new players will want to enter, anyway ...

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