In September 2019, the Securities and Exchange Commission (SEC) unanimously approved a rule to help modernize the regulatory framework for exchange traded funds (ETFs). The “ETF Rule” is an important milestone for our industry and is a positive development for the ETF ecosystem. BlackRock commends the SEC for its action.
A summary of BlackRock’s reactions to certain key provisions of the final ETF Rule follows:
1. Lower barriers to entry will help support future ETF growth.
- The streamlined regulatory framework of the ETF Rule will permit most ETFs to come directly to market without the cost and delay of obtaining an exemptive order.
- Eliminating this barrier to entry will allow new and existing issuers to launch traditional ETFs more rapidly and at reduced cost.
- We believe that this more efficient regulatory framework will encourage competition, foster innovation and increase investor choice
2. Wider use of “custom baskets” will benefit investors and the ETF ecosystem.
- “Custom baskets,” which are key ETF portfolio management tools, particularly for fixed income ETFs, help promote efficiency in the creation and redemption process.
- For investors, this can mean the potential for greater tax efficiency, better liquidity, and tighter bid-ask spreads.
- While BlackRock’s exemptive relief has allowed us to use custom baskets for most of our ETFs, we are pleased to see this flexibility extended to all ETFs relying on the ETF Rule.
- We also support SEC requirements for ETF issuers to detail policies and procedures that govern the construction of custom baskets that are in the best interests of the ETF and its shareholders.
3. Enhanced data disclosures will increase ETF market transparency.
- Portfolio transparency supports an efficient arbitrage mechanism; for instance, it allows market participants to easily detect the existence, and estimate the extent of, discrepancies between the value of an ETF’s portfolio and the real-time exchange price of an ETF’s shares.
- BlackRock currently provides full daily disclosure of portfolio holdings for all our ETFs in the U.S.; we are pleased that the same transparency standards are now required for all ETFs covered by the ETF Rule.
- We believe that additional website data disclosures required by the Rule, such as uniform disclosure around bid-ask spreads and ETF premiums and discounts versus net asset value, will help investors better understand the total costs of ETF investing.
- Easily accessible, standardized data will also facilitate independent ETF industry analysis by investors, academics and journalists.
4. Improvements are still needed in ETP classifications.
- While the Rule does not provide for an exchange-traded product (ETP) classification scheme, BlackRock still strongly believes that clearer identification and categorization of ETPs will help ensure that investors understand that certain types of products have greater embedded risks and more complexity than others.
- We are working with the industry to advocate for a solution that provides greater clarity to investors on the characteristics of different ETPs.
Context for the ETF Rule
On Sept. 26, 2019, the SEC approved a rule under the Investment Company Act of 1940 (the ’40 Act) that will allow ETFs that satisfy certain conditions to operate without first obtaining individual “exemptive relief.”
Historically ETF issuers were required to obtain exemptive relief from provisions of the ’40 Act for ETFs to operate as investment companies. More than 300 orders were issued since 1992. The SEC estimated that the median processing time for an exemptive order was historically about 221 days, and that the typical cost per application was about $100,000.
The ETF Rule applies to most ETFs organized under the ’40 Act. It does not apply to ETFs structured as Unit Investment Trusts (UITs), ETFs structured as a share class of a mutual fund, or non-transparent actively managed ETFs. While levered and inverse ETPs were initially out of scope, the SEC amended the ETF Rule to include levered and inverse ETPs, so long as they comply with all applicable provisions of Rule 18f-4 (“the derivatives rule”) passed in October 2020.
BlackRock submitted a detailed comment letter in response to the proposed Rule 6c-11 in September 2018.