The ETF Rule:'s Comment Letter

August 30, 2018

[Editor’s Note: As we have covered extensively on, the SEC is considering new rules that would simplify and streamline the process of launching ETFs. You can read the full text of the rule here. Following is the official comment letter submitted on behalf of by our Managing Director, Dave Nadig.]


Submitted via email to [email protected]


Mr. Brent J. Fields
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549


Re: Exchange Traded Funds: File No. S7-15-18


Dear Mr. Fields:

This letter is in response to the Securities and Exchange Commission (“SEC”) request for comments on the proposed changes to the Investment Company Act of 1940 to standardize the regulation of exchange-traded funds (ETFs).

In general, we voice our strong agreement with the intent and basic framework of the proposal as much needed and long overdue. However, we believe there is room for clarification and further detail, particularly in regard to the proposed disclosures and applications of the rule, which this letter will attempt to address.

General Comments:

1: While the proposed rule goes a long way toward leveling the playing field, it may not go far enough.

As proposed, the new rule would not apply to share-class ETFs or master-feeder structures. While there are solid reasons these special cases may require additional relief not included in the proposed rule, by exempting them from the entirety of the rule, share-class ETFs will not be required to make the same, important disclosures to investors as covered ETFs. Since share-class ETFs are solely the province of a single issuer due to patent protection (Vanguard), this will lead to a broad discrepancy in what investors can expect from issuers in terms of useful data.

We would recommend broadening the disclosure requirements to extend outside the four corners of 6c-11 and apply separately to all classes of ETFs.

2: The index vs. active discussion is largely irrelevant, but index methodologies require better disclosures.

As proposed, the rule effectively eliminates any meaningful distinction between index and active ETFs, and this is a good thing. However, ETFs claiming to follow an index as their investment strategy should be required to provide an index construction methodology through their website, regardless of whether or not the index is affiliated. The rise of so-called smart-beta index strategies has led to a proliferation of indexes, and in the absence of required disclosures, the transparency of these strategies varies widely.

We propose a simple test: Any index tracked by an ETF must disclose the index methodology in sufficient detail that someone practiced in the art could reconstruct a current portfolio based on publicly available information.

3: IIV/INAV is irrelevant and should be deprecated.

While the idea of a contemporaneous measure of fair value is enticing, in practice, it is inaccurate for 80% of all ETFs (ETFs holding securities that do not trade precisely contemporaneously with U.S. equity markets) and is not accurate enough for authorized participants to use in arbitrage analysis. We support the removal of INAV from the 1940 Act requirements and encourage exchanges and the Division of Trading and Markets to remove it from their rules as well.

4: Portfolio transparency is the right call, but structure is important.

The commission correctly asserts that full portfolio transparency is useful for investors and market participants broadly speaking, and we applaud both the mandate and simplification of the requirement. However, currently, portfolio disclosures vary widely, leaving individual investors at the mercy of websites, where institutional investors can rely on standardized feeds from (expensive) data providers.

We suggest portfolio disclosure be more clearly defined to include:

  • Standard file form: comma-separated values
  • Disclosure to include: security name, exchange, security identifiers (ticker, ISIN, SEDOL), number of securities, price or assessed value, weight (%)

Such disclosure matches best-in-class industry practice, and should apply equally to all classes of exchange-traded products (share class, master-feeder, UIT, grantor trust, etc.). Disclosure should be sufficient for the calculation of net asset value on the reported day, and thus needs to include all assets and liabilities of the fund.


Find your next ETF

Reset All