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Statement at Open Meeting on Exchange-Traded Funds (Proposed Rule)

June 28, 2018

I am pleased to support this proposed rule, governing one of the most popular investment vehicles and trading tools in the equity and fixed income markets today: exchange-traded funds (“ETFs”). Twenty-six years ago, the Commission began granting exemptions from certain rules in the Investment Company Act of 1940, which would allow ETFs to operate. Since that time, demand for ETFs has sky-rocketed as investors seized on these products as a way to gain exposure in their portfolios to a wide array of asset classes, geographies, and industry sectors. Today, it is staggering to think that this industry — which has ballooned to $3.4 trillion in total net assets — operates on a series of exemptive orders granted by the SEC staff or, in cases of novel products, the Commission. Each of these has its own particular requirements and conditions, with similar requirements phrased differently over time. The time has certainly come for the Commission to provide the ETF industry with regulatory certainty and consistency befitting its role in our markets.

I would like to thank the Director of the Division of Investment Management, Dalia Blass, for prioritizing the development of this proposed rule. Dalia’s sense of urgency reflects her keen awareness that we only have small windows of time to pursue good-government initiatives before market events or legislative mandates turn our attention to new issues of the day. This is not the first time that the Commission has voted to propose a rule governing ETFs. In March 2008, the Commission outlined a regulatory regime that would remove the need for many ETFs to obtain SEC exemptive orders before operating. As comments flowed into the Commission, however, a cascade of events pushed the U.S. into financial crisis and the subsequent Dodd-Frank Act mandates commandeered the Commission’s agenda for the next several years. I am happy that we are picking up about where we left off and putting a refreshed proposal out for public comment.

This proposal presents a framework for ETF regulation that is both uniform and fair. It largely codifies the relief and conditions contained in the series of exemptive orders previously granted to various ETFs. In particular, this proposal sets forth a principles-based approach, allowing funds to use custom creation/redemption baskets, which should substantially level the playing field for old and new entrants in this market. It also does not discriminate between passive and actively-managed ETFs, which would allow for more product innovation.

In addition to the benefits that this proposal would provide through regulatory certainty, I am also eager to see it advance because of the way that it could free up resources at both the SEC and in the ETF industry. The exemptive process is time-consuming, costly, and uses an inordinate amount of SEC staff man hours. By proposing uniform ETF regulation for certain standard products, we may free up both the ETF industry and our own staff to focus their energies on other innovative financial products.

Thank you. I have no questions.

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