Shutdown Impact Lingers For ETFs

January 30, 2019

Although the Securities and Exchange Commission (SEC) has resumed normal operations and staffing levels, ETF-related delays are likely to persist, according to statements made by the agency.

More than 4,500 employees have returned to work at the agency's Washington, D.C., headquarters and 11 regional offices located around the country. This includes the Division of Investment Management, the branch of the agency that handles most ETF filings.

According to a statement posted to the Division of Investment Management's website, the agency will be evaluating filings, exemptive relief requests and requests for guidance based on "when an item was amended or initially filed."

"Absent compelling circumstances, we expect to address matters in the order in which they were received," said the statement, adding that response times "for pending and new inquiries may be longer than ordinary."

Delays Persist In Launches, Approvals

The government shutdown, which lasted 35 days, did not impact ETF day-to-day trading or the ability of ETF issuers to post relevant filings to the EDGAR database. Nor did it do much to slow the mostly automatic launch process for the vast majority of ETFs.

In fact, during the furlough, 18 new ETFs launched, including one from a new issuer, Syntax (read: "Newcomer's ETF Reweights S&P 500").

However, any filing that required SEC approval or guidance was not likely to receive it. That included exemptive relief requests, new trust filings, delaying amendments, exchange rule change requests and more. Furloughed SEC employees weren't even allowed to listen to voicemail or check their email. (read: "SEC Shutdown's Impact On ETFs").

As a result, the pipeline that brings ETFs from concept to launch became a logjam, with no specific timeline on when the delays would clear. Issuers that had filed for new funds before the furlough were left for more than a month with no clarity about the status of their filings, while firms that filed during the furlough may now be forced to wait weeks, even months before the SEC will consider their proposals.

Inherently, that will translate into delays both in fund launches and debuts from new ETF issuers.

Issuers Eschew Launch-By-Default

Legally speaking, new funds filed out of existing trusts by issuers with existing exemptive relief in place automatically go into effect after a 60- or 75-day waiting period, with or without SEC approval.

However, few ETF issuers were willing to risk launching their particular ETFs based on a technicality, especially if there was a chance the SEC might later go back and tell the issuers to make significant changes to the fund, or even pull it altogether.

That uncertainty has left ETF companies in a "holding pattern," said Kian Salehizadeh, senior analyst for Blockforce Capital, which runs the Reality Shares family of ETFs.

"A lot of issuers who were waiting to file might just continue to wait," he added.

Bitcoin ETF Proposal Pulled

As of yet, it is unclear how many proposed funds were impacted by the shutdown, but the furlough has resulted in at least one high-profile filing before the SEC being pulled.

On Jan. 24, Cboe withdrew its proposal for a rule change to allow the proposed VanEck/Solid X bitcoin ETF to trade on its exchange, citing the government shutdown as motivation. (Cboe Global Markets is the parent company of ETF.com.)

The filing was one of two proposals left standing among the deluge of cryptocurrency funds that had been filed for over the past year. The SEC had rejected most of those proposals last summer, but afterward had taken them under further review. The government shutdown has suspended that review indefinitely (read: "Bitcoin ETFs Not Quite Dead Yet").

Jan Van Eck, CEO and founder of VanEck, told CNBC that the firm planned to refile the proposal and continue dialogue with the SEC: "Instead of trying to slip through or something, we just had the application pulled."

Threat Of Shutdown 2.0 Looms

Another potential SEC shutdown looms on the horizon. Congress' temporary resolution to reopen the government expires on Feb. 15. Should the resolution expire without federal funding in place, another SEC furlough would go into effect, and operations at the agency would cease once more.

That leaves ETF issuers wanting to launch new funds with a choice: Either rush to file proposals in the two-week window in which the government is sure to remain open; or hold off filing for new funds altogether, until the shutdown drama can be resolved for good.

"As an issuer, all we can do for the new [funds] we have in the works is to prepare our legal documentation, so that everything is ready to go," said Salehizadeh. "But if this [shutdown] becomes a longer-term theme, where they open the government for three weeks, then close it, then open again, it could become a nightmare."

Ironically, the SEC's proposed ETF rule would help bolster and streamline the fund launch process, even during a shutdown, by eliminating the need for exemptive relief, among other things.

However, review of that proposed rule has also been suspended, due to the shutdown. It is unclear when, or even if, it will be restarted.

Contact Lara Crigger at [email protected]

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