New SEC Rules Streamline ETF Launch Process

Exchange-traded funds have exploded in popularity in recent decades, but the U.S. Securities and Exchange Commission made some major changes to regulations this week that could have a significant impact on ETF traders.

What Happened

On Thursday, the SEC announced a new, modernized set of regulations that apply specifically to ETFs. Under the previous set of regulations, ETFs gained listing approval based on mutual fund regulations dating back to the 1940s.

As a workaround, new ETFs had to apply for “exemptive relief” from mutual fund rules, a timely and costly process that made new ETF listings difficult.

In addition, new tax regulations ease the cost burden of actively traded funds. Fund issuers will now also be allowed leeway in swapping stocks and bonds that don’t exactly match the proportions of the fund’s holdings.

Why It’s Important

The new set of rules may open the floodgates for new funds. More than $3.3 trillion in assets are held in roughly 2,000 ETFs, but there are still far fewer total ETFs than mutual funds.

Now, ETFs will not need permission to launch as long as they provide regulators and investors with a proper prospectus.

ETFs must also provide public daily updates of fund holdings to qualify. The daily disclosure requirement could discourage new funds with complex investment strategies that may not want the public to interpret their trading strategies.

“We think small asset managers will expand their product lineups and new entrants will seek to join the ETF industry, particularly with thematic offerings,” CFRA analyst Todd Rosenbluth said of the new rules.

Benzinga’s Take

The new SEC rules may lead to more funds, more choices for investors and more ways to make thematic investments via ETFs. Investors should also anticipate that increased competition in the ETF space could lead to a significant number of funds being shut down.

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