SEC Acts on Liquidity Disclosure Rules and Proposes Easing Regulation of ETF Launches

At an open meeting on June 28, 2018, the SEC adopted liquidity disclosure amendments and proposed new rules to ease the approval process for new exchange-traded funds (ETFs). 

With regard to the liquidity rules, which were initially adopted by the Commission in October 2016, the Commission approved amendments to Form N-PORT changing certain pending disclosure requirements. The first amendment eliminates the requirement that funds publicly provide the aggregate liquidity classification profile of their portfolios on Form N-PORT. Instead, the amendment requires funds to include “brief, narrative” disclosure in their annual or semiannual shareholder reports regarding the operation and effectiveness of their liquidity risk management programs. The second amendment allows funds the flexibility to split their N-PORT classification of portfolio holdings into more than one category under certain limited circumstances. Under the amendments, funds must also disclose on N-PORT cash/cash equivalent holdings not otherwise reported on the Form. For more information, please visit https://www.sec.gov/news/press-release/2018-119.

The Commission also proposed new rule 6c-11, which would permit ETFs that meet certain conditions to come to market without needing to apply for exemptive relief. The conditions of the proposed rule are generally the same as the conditions currently required to obtain exemptive relief. The proposed conditions also include the following requirements: (i) daily posting of portfolio holdings on an ETF’s website; (ii) usage of custom baskets (i.e., baskets that do not reflect a pro-rata representation of a fund’s portfolio) conditioned on the adoption of certain written rules and procedures; and (iii) increased website disclosure regarding historical information on premiums/discounts and bid-ask spreads. If adopted, the proposed rule would revoke exemptive relief previously granted to ETFs that would now be able to operate under the rule. The rule would not cover ETFs organized as unit investment trusts, ETFs structured as a share class of a multiclass fund, or leveraged or inverse ETFs. The proposed rule is open to comment for 60 days from publication of the rule in the Federal Register. For more information, please visit: https://www.sec.gov/news/press-release/2018-118.