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SEC Grants No-Action Relief Regarding Created ETF Shares and Failure to Close Transactions

In a letter dated April 26, the Division of Trading and Markets of the Securities and Exchange Commission granted no-action relief to Latour Trading LLC (Latour Trading) in connection with its proposed use of newly created exchange traded fund (ETF) shares to comply with the requirements set forth in Rule 204 (Close-Out Requirement) of Regulation SHO (Rule 204). This rule requires a participant of a registered clearing agency to: (1) deliver securities to a registered clearing agency for clearance and settlement on a long- or short–sale transaction in any equity security by an applicable settlement date; or (2) close out a fail-to-deliver position at a registered clearing agency in any equity security for a long- or short-sale transaction in that equity security by borrowing or purchasing securities of like kind and quantity, by the beginning of regular trading hours on the applicable close-out date.

Latour Trading proposed to satisfy Rule 204 obligations with respect to the close out of a fail-to-deliver position in the securities of a covered ETF by submitting irrevocable instructions to an Authorized Participant (AP) of the covered ETF to create shares in such ETF. Such instructions would be given to the AP no later than the beginning of regular trading hours on the applicable close-out date; but because the creation process occurs after the beginning of regular trading hours, ETF share creations are not completed until sometime after the beginning of regular trading hours. The SEC staff granted no-action relief to Latour Trading based on the view that such an approach is consistent with the strict close-out requirements of Rule 204, contingent upon Latour Trading complying with several requirements including, but not limited to, ensuring that orders placed with the AP cannot be modified and such orders are reflected on the books and records of the firm.

A copy of the no-action letter is available here.

©2017 Katten Muchin Rosenman LLP


About this Author

Janet M. Angstadt, Securities Lawyer, Katten Muchin

Janet M. Angstadt is the head of Katten's Chicago Financial Services practice. She focuses her practice on broker-dealer and exchange compliance issues and advises companies on matters regarding compliance with the regulations of the US Securities and Exchange Commission (SEC) and self-regulatory organizations (SROs).

Janet represents clients in a wide range of legal and regulatory matters, including mergers and acquisitions, SRO investigations, compliance issues related to registrations, sales practice, short sales, Regulation NMS, market-making and...

Stanley V. Polit, Katten Muchin, Financial Services lawyer, Corporate Regulatory Matters Attorney

Stanley Polit concentrates his practice in transactional, corporate and regulatory aspects of financial services matters. Stan is able to provide legal services to a wide variety of clients including proprietary trading firms, hedge funds, broker-dealers, registered investment advisers, commodity trading advisers, financial institutions and general corporate clients.

Prior to joining Katten, Stan served as a council member for a national crisis management firm, where he specialized in crisis communication and merged media strategies. He has lectured extensively and conducted trainings related to these topics at numerous national and international conferences, including the National Communication Association's National Convention, the International Crisis and Risk Communication Conference and the Disaster Recovery Journal's World Business Continuity Conference.