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BlackRock and the SEC’s ETF Rule

The Securities and Exchange Commission (SEC) has proposed new rules that would help modernize the regulatory framework for ETFs. BlackRock strongly supports the SEC’s proposal. We believe that the proposal will increase the information available to investors, improve consistency in the SEC’s regulatory regime for ETFs, and eliminate potential barriers to entry, while preserving important investor protections. However, we see opportunities for the SEC’s proposal to be improved prior to adoption. Our comments are of a technical nature, intended to improve the proposal and ensure it aligns with current best practices in the ETF industry.

BlackRock submitted a detailed comment letter in response to the proposed Rule 6c-11. A summary of BlackRock’s comments on key provisions follows.

1.

Standards around “custom baskets” will help support future ETF growth

 

a.

BlackRock supports the SEC’s proposal to allow “custom baskets,” which are key ETF portfolio management tools, particularly in fixed income.

 

b.

There are times when investors benefit from ETF share creation or redemption baskets that are not perfect index replicas.

 

c.

Basket customization helps promote efficient ETF share creations and redemptions, which for investors can mean greater liquidity and pricing that closely reflects changing market conditions.

 

d.

BlackRock supports the rule’s proposal to require that ETFs adopt written policies and procedures governing the usage of custom baskets.

2.

Investors should have a clearer view into total costs associated with buying and selling ETF shares

 

a.

BlackRock supports the SEC’s proposal to require standardized disclosure of potential transaction costs, including bid-ask spreads.

 

b.

Too much ETF industry data is difficult or expensive to access, and there is no agreement on how even simple metrics should be calculated; data fragmentation impedes independent analysis by investors, academics and journalists.

 

c.

Enhanced disclosure around trading will help investors better understand the total cost of ETF ownership.

 

d.

The SEC has proposed that each issuer provide a trading cost calculator on their website; BlackRock instead suggests that the SEC enlist a third party, or that a unit of the SEC build and maintain a calculator tool, to help streamline investors’ experience.

 

e.

A single tool would also advance the technology utilized by other industry participants, such as brokerage platforms, by promoting a standardized calculation methodology.

3.

A clear-cut ETF naming convention would better serve investors

 

a.

“ETF” has become a blanket term to describe exchange traded products even though other product structures have materially different risks.

 

b.

BlackRock is concerned that investors may mistakenly assume that all products commonly referred to as ETFs are structured and regulated the same. This concern is only heightened as the SEC considers a more consistent ETF regulatory regime.

 

c.

While the proposed rule does not address leveraged and inverse ETFs, BlackRock believes that these products warrant a separate naming convention that better reflects their potential risks.

 

d.

BlackRock defines an ETF as a publicly offered investment fund that: 1) trades on an exchange; 2) tracks underlying securities of stocks and bonds, or other investment instruments; 3) does not have leveraged or inverse features.

Context for the ETF Rule

On June 28, 2018, the SEC proposed a new rule under the Investment Company Act of 1940 that, if adopted, will allow most ETFs to come directly to market without the costs and delays associated with obtaining individual exemptive orders. ETF issuers currently must obtain “exemptive relief” from provisions of the ’40 Act for ETFs to operate as investment companies. More than 300 orders have been issued since 1992. The SEC estimates that the median processing time for an exemptive order has historically been about 221 days, and that the typical cost per application is about $100,000.