SEC Provides No-Action Relief for ETF Concentration Policy Exceedances

In late July, the Securities and Exchange Commission (SEC) Division of Investment Management issued a no-action relief letter to an industry trade association confirming that the Commission staff would not recommend an enforcement action against an ETF issuer that exceeds its disclosed industry concentration policy. The Commission staff will not recommend an enforcement action so long as one of the scenarios below is met:

• The ETF accepts a pro rata creation basket that includes investments in the over-weighted industry,
• The ETF uses cash instead of a creation basket component to purchase that security up to an amount consistent with a pro rata basket, or
• The ETF receives a non-pro rata creation basket whose industry weighting is consistent with that of a pro rata basket.

The Commission staff further confirmed that no-action relief applies equally to actively managed ETFs and index-based ETFs. According to a client alert from Ropes & Gray, the relief “reduc[es] the risk that ETFs must take disruptive or costly action solely in response to market-driven fluctuations outside the ETF adviser’s control.” The Ropes & Gray alert recommends that ETFs and their advisers review basket construction and compliance procedures, coordinate with relevant stakeholders (APs, index providers, portfolio management teams, etc.), and review public disclosures and fund board reporting.  

Click here to read the no-action relief from the Division of Investment Management.

Click here to read a client alert from Ropes & Gray.