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Statement at Open Meeting on Exchange-Traded Funds

Chairman Jay Clayton

June 28, 2018

Exchange traded funds – or ETFs – are one of the most popular innovations in investments in the past quarter century.  Today, there are over 1,900 registered ETFs with assets of over 3.4 trillion dollars. 

ETFs have brought choice to investors, both institutional and Main Street.  Institutional investors use ETFs as convenient vehicles for participating in, or hedging against, broad movements in the stock market.  For Main Street investors, ETFs are a popular investment option, providing them with convenient access to traditional and alternative investment strategies.  Brokers and investment advisers are increasingly placing more of their clients’ assets in ETFs.  In fact, one out of every three investors holds ETFs.  That is a remarkable statistic to think about.  Younger investors are particularly drawn to ETFs.  According to a survey of ETF investors, so-called “millennial” investors – between the ages of 25 and 37 – are putting about 36% of their investments into ETFs.[1]

Notably, ETFs are the product of the regulatory sandbox that Congress built into the 1940 Act when it granted the Commission statutory exemptive authority.  ETFs rely on hundreds of individual exemptive orders granted by the Commission that have permitted them to evolve from domestic index ETFs tracking broad, well-known stock indexes, to ETFs that track virtually every conceivable asset class.  But relying on exemptions is not without price.  Time to market may be lost while a sponsor files for the appropriate exemptions, which can take months to obtain, if at all.  Lost or delayed market opportunity may impact capital formation and investor returns.  But more critically, as the ETF market evolved, the terms and conditions in the exemptive orders evolved, resulting in substantially similar ETFs sometimes being dissimilarly situated from a regulatory perspective. 

In 2008, the Commission proposed a rule that would have allowed ETFs to operate without an exemptive order, provided that they meet certain conditions.  At the time the rule was proposed, there were only 60 orders, which covered approximately $580 billion in total ETF assets.  That rule was not adopted, and the ETF space continued to grow and diverge under the exemptive application rubric.  In hindsight, that was a missed opportunity, as it is now clear that a common framework for approval of certain ETFs is more appropriate than allowing for continued growth and divergence under an exemptive order regime.

With that in mind, today we are considering the proposal of a new rule that would bring greater consistency, transparency, and efficiency to the regulatory framework for ETFs, and would facilitate greater competition and innovation in the ETF market.  It would eliminate the cost and expense of the exemptive order process for most ETFs.  The proposed rule also would free up valuable staff time to focus on matters that would have a greater impact on markets and investors.

The proposed rule would cover most ETFs operating today and all similar ETFs that sponsors may seek to launch in the future.  To achieve that consistent, transparent, and efficient regulatory regime, the proposal would rescind the existing exemptive orders granted to eligible ETFs.  This would level the playing field across those ETFs, and – because the conditions of the proposed rule are generally consistent with the conditions of our exemptive orders – would do so without placing a significant burden on existing ETFs to comply with the proposed rule.

But, the rule would not cover all ETFs.  The exemptive order process would continue to apply to certain ETFs, such as ETF structures that have limited interest or raise considerations that are outside the scope of the proposal.  I believe that the staff’s recommendation carefully and thoughtfully distinguishes which ETFs would be eligible for the new rule and which would continue to be subject to the exemptive order process.

And with that, I would like to thank the staff for their dedication and rigorous work on this proposal.  Specifically, I would like to thank:

From the Division of Investment Management:  Dalia Blass, Sarah ten Siethoff, Timothy Husson, Brian Johnson, Daniele Marchesani, Christian Sandoe, Melissa Gainor, Jacob Krawitz, Sumeera Younis, Zeena Abdul-Rahman, Joel Cavanaugh, Timothy Dulaney, John Foley, and Kay-Mario Vobis.

From the Office of the General Counsel:  Lori Price, Marie-Louise Huth, Bob Bagnall, Maureen Johansen, and Emily Rosen.

From the Division of Economic Risk and Analysis:  Chyhe Becker, Scott Bauguess, Lauren Moore, Anzhela Knyazeva, Michael Anderson, Haimanot Gebeyehu, Chantel Hernandez, Jennifer Juergens, Alexander Schiller, and Rooholah Hadadi.

From the Division of Trading and Markets:  Michael Coe, John Guidroz, Molly Kim, and Darren Vieira.

And from the Division of Corporation Finance: Amy Starr.

Now I will turn it over to Dalia Blass, our Director of the Division of Investment Management.

 

[1]           See Gerrard Cohen, Millennials Show More Love for ETFs (and Vice Versa) Than Their Parents Do, The Wall Street Journal, Sept. 5, 2016.

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