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Update on Proposed Listing Standards for Active Exchange Traded Funds

The SEC is considering an amended proposal by NYSE Arca to adopt generic listing standards for actively managed ETFs.

On June 5, the US Securities and Exchange Commission (SEC) issued an order (the Order) instituting proceedings under section 19(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) to consider whether to approve or disapprove a proposed rule change, as amended (Proposed Rule), that NYSE Arca, Inc. (NYSE Arca) submitted. [1] The Proposed Rule, if approved, would permit NYSE Arca to adopt generic listing standards for shares of actively managed exchange-traded funds (ETFs). The Proposed Rule amends NYSE Arca’s original proposal, which was published in the Federal Register in March 2015.[2] We previously discussed the substance of the original proposal, for which this LawFlash is designed to act as an update.[3] The Order solicits comments on the Proposed Rule.

The Proposed Rule is substantially similar to the original proposal, with the following exceptions:

  • The Proposed Rule would require an actively managed ETF that relies on the generic listing standards to disclose on its website certain information relating to the ETF’s holdings that form the basis for determining the ETF’s net asset value at the end of the business day. In the original proposal, this information would only have been required for an ETF’s holdings of derivatives. Under the revised proposal, for each holding, an ETF would have to disclose identifying and other information, specifically

    • The ticker symbol;

    • CUSIP or other identifier;

    • A description of the holding;

    • For derivatives, the identity of the security, commodity, index, or other asset on which the derivative is based;

    • For options, the strike price;

    • The quantity of each security or other asset held as measured by (i) par value, (ii) notional value, (iii) number of shares, (iv) number of contracts, and (v) number of units;

    • The maturity date;

    • The coupon rate;

    • The effective date;

    • The market value; and

    • The percentage weighting of the holding in the ETF’s portfolio.

  • The Proposed Rule clarifies that the requirement that an actively managed fixed income ETF’s portfolio include at least 13 nonaffiliated issuers would not apply if at least 70% of the ETF’s portfolio consists of equity securities.

  • Like the original proposal, the Proposed Rule provides that there generally would be no limitation imposed on the percentage of an active ETF’s overall portfolio that may be invested in derivative instruments. However, the Proposed Rule specifies that (i) no more than 60% of the portfolio’s assets may be invested in over-the-counter (OTC) derivatives and (ii) no more than 20% of the portfolio’s assets may be invested in OTC derivatives that are not centrally cleared.

The SEC is seeking comments on the Proposed Rule, particularly with respect to the proposed limitations on OTC derivatives. Specifically, the SEC appears to be interested in understanding whether the proposed limitations are sufficient to support the arbitrage mechanism that generally maintains alignment between intraday trading prices of ETF shares and the contemporaneous value of the underlying portfolio. The SEC is also seeking comment on the sources of pricing information available for OTC derivatives.

As we have previously discussed, adopting the listing standards would significantly reduce the time and money required to launch active ETFs that are able to satisfy the Proposed Rule’s conditions. We will continue to monitor these developments and expect to report on further actions that the SEC and NYSE Arca take in this area.

[1]. NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings to Determine Whether to Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, to Amend NYSE Arca Equities Rule 8.600 to Adopt Generic Listing Standards for Managed Fund Shares (June 5, 2015), available here. Section 19(b)(2) of the Exchange Act provides that, after initiating disapproval proceedings, the SEC shall issue an order approving or disapproving a proposed rule change not later than 180 days after the date of publication of notice of filing of the proposed rule change. The SEC may extend the period for issuing an order approving or disapproving the proposed rule change, however, by not more than 60 days if the SEC determines that a longer period is appropriate and publishes the reasons for such determination. 15 U.S.C. 78s(b)(2).

[2]. NYSE Arca, Inc., Notice of Filing of Proposed Rule Change Relating to Amendments to NYSE Arca Equities Rule 8.600 to Adopt Generic Listing Standards for Managed Fund Shares (Mar. 4, 2015), available here.

[3]. See Richard F. Morris, John J. O’Brien, Jeremy Esperon, “SEC Considers Active ETF Listing Standards, Approves Paired Class ETP” (Mar. 19, 2015), available here.

Copyright © 2022 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume V, Number 166

About this Author

W. John McGuire, Morgan Lewis, Investment Regulation Lawyer,

John McGuire counsels clients on investment company and investment adviser regulatory issues and related issues affecting broker-dealers and transfer agents. He also assists clients with forming and acquiring investment companies and investment advisers. John routinely handles matters involving the establishment, representation, and counseling of exchange traded investment companies (ETFs), their advisers, and listing markets.

Jeremy Esperon, Morgan Lewis, Investments, Securities Lawyer

JJeremy Esperon focuses his practice on the regulation of investment companies and investment advisers. He advises clients on the formation, registration, and ongoing regulation of investment companies, with a focus on exchange-traded funds (ETFs), and provides ongoing advice regarding various regulatory compliance and securities law issues. Jeremy also advises on closed-end fund shelf offerings and related regulatory issues.

John O'Brien, investment management lawyer, Morgan lewis law firm

John J. “Jack” O’Brien counsels registered and private funds and fund managers in connection with organizational, offering, transactional, and compliance matters. He regularly works with a variety of different fund structures, including open-end and closed-end funds, exchange-traded funds, and hedge funds. He also counsels investment adviser and broker-dealer clients on various matters, particularly with respect to registration and disclosure, marketing regulations, pay-to-play issues, and transactions in exchange-traded funds.