The long-awaited (and nearly 300-page long) ETF rule proposal by the U.S. Securities and Exchange Commission initially in June was met by little fanfare or controversy from the fund issuers, retail and institutional investors, and trading firms which encompass this nearly $3.6 trillion product market.
Yet, while the core force of the rule is unassailable — to codify 25 years of patchwork relief from parts of the Investment Company Act of 1940 — disagreement around the edges of procedures, data and disclosure came out loud and clear in 40 industry comment letters submitted to the SEC through mid-November.
"From an investment company regulatory perspective, the rule puts to the side the more unique issues in order to move forward with the relief that is relevant to the most ETFs," said Michael Mundt, partner with Stradley Ronon Stevens & Young in Washington. "But there are fundamental questions about the utility of some of the information that the SEC said issuers would need to disclose or publish on their websites," he said in an interview.
Mr. Mundt, who previously helped spearhead ETF policy at the SEC, pointed to trading spreads and basket-related disclosures, the specific securities that brokers known as authorized participants exchange to create or redeem shares of an exchange-traded fund.
"The proposed rule to require dissemination of trading premiums/discounts to net asset value would also require additional work," said Reginald M. Browne, senior managing director of the ETF group at Cantor Fitzgerald.
"The calculation of NAV currently is not standardized across all asset classes, let alone across ETF sponsors," Mr. Browne said. The ETF business line was recently sold to GTS, the largest designated market maker at the New York Stock Exchange and Mr. Browne will be moving to GTS.