The SEC’s new exemptive rule for exchange-traded funds exempts ETFs from many of the requirements of the Investment Company Act of 1940, but it doesn’t exempt ETF insiders from Section 16 of the 1934 Act.
ETFs generally have had to apply for an exemptive order from the SEC in order to operate as open-end investment companies subject to the 1940 Act. Now ETFs can rely instead on the exemptions provided by new Rule 6c-11. Some commenters had asked the Commission to include a Section 16 exemption as well, but the Commission declined, saying that existing staff no-action letters reflect a better approach. Those letters relieve ETF insiders from complying with Section 16 only so long as there is no material difference between the trading price of the ETF’s stock and the ETF’s net asset value per share.
The staff’s position is based on the notion that, because an ETF’s stock simply reflects the value of the ETF’s portfolio, and ETF insiders don’t have access to material nonpublic information about the portfolio companies, subjecting insiders to Section 16 does not serve the purposes of Section 16. The Commission said in the Rule 6c-11 adopting release that “expanding on the existing staff no-action letters by providing exemptions from [Section 16] even when there is a material deviation between market price and NAV would be inconsistent with the exemptions in Rule 6c-11.”
So, the new rule doesn’t have any effect on Section 16 compliance. As before, if ETF insiders want relief from Section 16, they will need to obtain it through the no-action letter process.
-Alan Dye, Section16.net October 1, 2019
