SEC Approves NYSE Arca Rule Change That Allows Semi-Transparent Active ETFs to Use Custom Baskets

On September 24, 2021, the NYSE Arca, Inc. (Exchange) obtained approval from the SEC to implement a rule change that allows semi-transparent active exchange-traded funds (ST ETFs)1 to use custom baskets of securities, consistent with an ST ETF’s exemptive relief under the Investment Company Act of 1940 (1940 Act).

The Exchange has amended NYSE Arca Rule 8.601-E (Rule), which permits the listing and trading of shares of ST ETFs. The Rule previously only permitted shares of the ST ETF to be created and redeemed in return for the Proxy Portfolio and/or cash. The amended Rule also permits creations and redemptions of shares in return for a custom basket (which is a portfolio of securities that is different from the Proxy Portfolio), to the extent consistent with an issuer’s exemptive relief under the 1940 Act. The use of custom baskets increases flexibility for the ST ETF and has the potential to reduce trading costs, increase efficiency and improve secondary markets for the shares of the ST ETF.

The amended Rule also includes changes to the initial and continued listing requirements for ST ETFs, including a requirement that, prior to the opening of trading on each business day, the ST ETF make publicly available on its website the composition of any custom basket transacted on the previous business day.

In addition, the amended Rule requires that the adviser to the ST ETF create and maintain “fire walls” between specified parties (e.g., the adviser and an affiliated broker-dealer) with respect to information about the composition of custom baskets, and that certain persons of the adviser and ST ETF be subject to procedures reasonably designed to prevent the use and dissemination of material non-public information with respect to custom baskets, as was already required for information concerning the actual portfolio holdings of the ST ETF and Proxy Portfolio.

The SEC order granting the approval of the proposed rule change can be found here.


1 ST ETFs are exchange-traded funds that generally do not disclose their full portfolio holdings each day before trading begins on the stock exchange where they are listed. Rather than disclosing its entire portfolio, an ST ETF that follows a proxy portfolio model discloses a specified portfolio of securities, other financial instruments and/or cash designed to track closely the daily performance of the actual portfolio of the ST ETF (Proxy Portfolio).

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