On May 13, 2020, a group of six ETF sponsors submitted letters to Cboe Global Markets, Inc., NASDAQ, and Intercontinental Exchange Inc. (the parent of NYSE Arca) urging that each exchange adopt exchange listing rules or other means to categorize exchange-traded products (ETPs) differently (ETP Letter). The ETP Letter proposes an alternative classification scheme, which would limit the use of the terms “exchange-traded fund” and “ETF” to funds that are registered under the 1940 Act and can rely on Rule 6c-11 or exemptive relief. The ETP Letter proposes additional categories for exchange-traded notes (ETNs), exchange-traded commodities (ETCs) and exchange-traded instruments (ETIs). ETIs would be a catch-all category for products that do not qualify for any of the ETF, ETN or ETC categories.
The SEC has received a similar proposal in the past from the Fixed Income Market Structure Advisory Committee (FIMSAC) in a comment letter on the 2018 Rule 6c-11 proposal (FIMSAC Comment Letter). The SEC did not limit the use of the term ETF by funds when it adopted Rule 6c-11, but the SEC has requested comment in a March 2, 2020 release regarding whether certain funds or other vehicles should be treated differently under Rule 35d-1 under the 1940 Act or the antifraud provisions of the federal securities laws.
While it is not clear if the ETP Letter or the SEC’s request for comment will ultimately result in limitations on which vehicles can use the terms “exchange-traded fund” or “ETF” in their names, any such limitations would not apply to how such vehicles are characterized by the press or other third-party media outlets. Therefore, confusion arising from the characterization of all ETPs as “exchange-traded funds” or “ETFs” in those mediums would likely continue. It will remain incumbent on investors and their financial advisers and intermediaries to understand the differences among such products. The article, “What’s in a Name? ETF or Not – Does it Matter?” by Paul Miller and Anthony Tu-Sekine, discusses the implications of ETP categorization for registered advisers from a legal and compliance perspective and outlines an approach to identifying and addressing these products for compliance purposes.
The ETP Letter, the FIMSAC Letter and the SEC’s March 2, 2020 request for comment are available at the links below.
- ETP Letter: https://www.blackrock.com/corporate/literature/publication/letters-to-exchanges-regarding-etp-classification-051320.pdf
- FIMSAC Comment Letter: https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-etp-naming-convention-recommendation.pdf
- SEC Request for Comment: https://www.sec.gov/rules/other/2020/ic-33809.pdf