Rule 6C-11 Effective Date
Pursuant to our proposal, ETFs based on Rule 6c-11 are considered “repayable collateral” within the meaning of section 2(a)(32) of the Act.  ETFs have characteristics that distinguish them from traditional open-ended and closed-end funds. A defining feature of open-ended funds is that they offer redeemable securities that allow the holder to receive their proportionate share of the net asset value per unit of the fund upon presentation of the security to the issuer. Although individual shares of ETFs cannot be repurchased except in certain circumstances, they may be repurchased in aggregations of creative units.  Accordingly, we believe that, under the final rule, ETF shares are better classified as redeemable securities within the meaning of section 2(a)(32) and that ETFs should be regulated as open-ended funds within the meaning of section 5(a)(1) of the Act.  As passed, Rule 6c-11 will exempt ETFs organized as open-ended funds from certain provisions of the Act and our rules. The exceptions allow an ETF to: (i) repurchase shares only in the context of aggregations of creative units; (ii) allow the purchase and sale of ETF shares at market prices instead of net asset value; (iii) conduct physical transactions with certain related enterprises; and (iv) in certain limited circumstances, pay the proceeds of the share repurchase to authorized participants within more than seven days. We therefore do not think it is appropriate at this stage to impose a minimum number of allowed participants that an ETF can use. The use of derivatives through leveraged or reverse ETFs also raises issues under section 18 of the Act, which limits a fund`s ability to leverage.  The Commission assessed these issues under section 18 as part of a broader review of the use of derivatives by registered funds and business development corporations (“BDCs”).  We have therefore proposed to exclude leveraged/reverse ETFs from the scope of Rule 6c-11 to allow the Commission to fully assess these concerns with other leveraged funds.  We also suggested allowing leveraged or reverse ETFs and their sponsors to continue to rely on their existing exemption relief to maintain the status quo.  Accordingly, Rule 6c-11 requires full and daily disclosure of ETF portfolio holdings based on this rule.
However, as explained below, the portfolio transparency requirement we have adopted includes several changes to the proposed rule, including changes to the required timing and disclosure of portfolio assets. After reviewing these comments, we decided to include a condition that prevents leveraged or reverse ETFs from relying on the rule.  While leveraged/reverse ETFs are structurally and operationally similar to other types of ETFs covered by Rule 6c-11, we consider it premature to allow sponsors to form and operate leveraged or reverse ETFs based on the rule without first addressing investor protection objectives and concerns underlying section 18 of the Act. We therefore believe that the Commission should complete its broader review of the use of derivatives by registered funds before considering basing leveraged/reverse ETFs on the rule. However, leveraged/reverse ETF sponsors argued that the rule should not exclude leveraged/reverse ETFs. They stated that investors in leveraged/reverse ETFs understand the particular concerns surrounding these products, accept the risks of the products and make appropriate use of them.  One of these commentators noted that the relaxation of the rule is aimed at the structural and operational characteristics of ETFs and that leveraged or reverse ETFs are structured and operated in the same manner as other ETFs covered by the rule.  Among other similarities, the commenter noted that leveraged or reverse ETFs are structured as open-ended funds, offer complete portfolio transparency, and accept creation and redemption baskets that use the same operating mechanisms as other ETFs. The commenter also stated that leveraged/reverse ETFs should not be excluded from the scope of the rule, as other ETFs that use leverage in their investment strategies are not excluded from the scope of the rule. As proposed, Rule 6c-11 does not require ETFs to publish an intraday estimate of their NAV per share (an “intraday benchmark” or “IIV”) as a condition of eligibility for the rule.
Our mandates require the distribution of a VCI, and ETFs have indicated in their exemption applications that the IIV of an ETF is useful to investors because it allows them to determine (by comparing the VCI to the market value of the ETF`s shares) whether and to what extent the ETF`s shares are traded at a premium or discount on an intraday basis.  Currently, listing standards also require ETFs to propagate a VII at least every 15 seconds during normal trading hours.  Commission adopts 17 CFR 270.6c-11 (new rule 6c-11) of the Investment Company Act [15 U.S.C. 80a-1 et seq.]; Amendments to Form N-1A [referenced to 17 CFR 274.11A] pursuant to the Investment Company Act and the Securities Act of 1933 [15 U.S.C. 77a et seq.] (“Securities Act”); and amendments to Forms N-8B-2 [referenced in 17 CFR 274.12] and N-CEN [referenced in 17 CFR 274.101] pursuant to the Investment Company Act. The Commission is also adopting technical amendments to Forms N-CSR [referred to in section 274.128], Forms N-1A, N-8B-2 and N-PORT [referred to in section 274.150] pursuant to the Investment Company Act, and 17 CFR 210.12-01 to 210.12-29 (section 12 of Regulation S-X). These disclosure requirements apply to certain ETFs that do not fall under Rule 6C-11. The ETF rule also includes several amendments to Form N-8B-2, the registration form used by ITU that reflects the requirements of Form N-1A. Finally, an ETF must indicate in the N-CEN reports whether it is relying on Rule 6c-11. 1 See Exchange-traded funds, exit number. IC-33646 (25 September 2019), 84 Fed. Reg.
57,162 (24. October 2019) www.sec.gov/rules/final/2019/33-10695.pdf (statement of acceptance). Disclosure of average bid-ask spread. ETFs under Rule 6c-11: Are required to disclose only the median bid-ask spread on their website. The new rule requires ETFs to retain and retain copies of all written agreements between an Authorized Participant and the ETF (or one of the ETF`s service providers) that allow the Authorized Participant to purchase or redeem Creative Units. Commentators who addressed this aspect of the proposal were generally in favour of excluding ITU ETFs from the scope of Rule 6c-11. These commentators explained that the structural and operational nuances associated with ITU ETFs would make their inclusion in Rule 6c-11 impractical.  These commenters also generally agreed that existing ITU ETFs should continue to rely on their individual exemption orders and that the Commission should evaluate new ITU ETFs as part of the exemption order process. However, one commenter suggested that the Commission consider possible updates to the ITU ETF exemption orders to reflect certain sponsorship services that were not considered at the time the order was made.  As proposed, Rule 6c-11 will partially define an “exchange-traded fund” as a fund that issues units listed on a national stock exchange and traded at market prices.  Listing is one of the fundamental characteristics that distinguishes ETFs from other types of open-ended (and ITU) funds and is one of the reasons why ETFs require certain exemptions from the laws and regulations they contain.
Quotation provides an organized and continuous trading market for ETF shares at market-determined prices and is therefore important for a functional arbitrage mechanism.  The Commission made all of its prior exemption requests conditional on the listing of its shares on an ETF on a national stock exchange. Rule 6c-11 requires ETFs to meet certain investor protection conditions and to comply with the purposes reasonably provided for in the policy and provisions of the Act to operate within the Act. These terms are generally consistent with the terms of our exemption orders, which we believe effectively reflect the unique structural and operational characteristics of ETFs while maintaining adequate protection for ETF investors.