Conformed to Federal Register version SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 210, 232, 239, 270, and 274 [Release Nos. 33-10695; IC-33646; File No. S7-15-18] RIN 3235-AJ60 Exchange-Traded Funds AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (the “Commission”) is adopting a new rule under the Investment Company Act of 1940 (the “Investment Company Act” or the “Act”) that will permit exchange-traded funds (“ETFs”) that satisfy certain conditions to operate without the expense and delay of obtaining an exemptive order. In connection with the final rule, the Commission will rescind certain exemptive relief that has been granted to ETFs and their sponsors. The Commission also is adopting certain disclosure amendments to Form N-1A and Form N-8B-2 to provide investors who purchase and sell ETF shares on the secondary market with additional information regarding ETF trading and associated costs, regardless of whether such ETFs are structured as registered open-end management investment companies (“open-end funds”) or unit investment trusts (“UITs”). Finally, the Commission is adopting related amendments to Form N-CEN. The final rule and form amendments are designed to create a consistent, transparent, and efficient regulatory framework for ETFs that are organized as open- end funds and to facilitate greater competition and innovation among ETFs. The Commission also is adopting technical amendments to Form N-CSR, Form N-1A, Form N-8B-2, Form N-PORT, and Regulation S-X. DATES: Effective Date: This rule is effective December 23, 2019. Compliance Dates: The applicable compliance dates are discussed in section II.L. of this final rule. FOR FURTHER INFORMATION CONTACT: Joel Cavanaugh (Senior Counsel), John Foley (Senior Counsel), J. Matthew DeLesDernier (Senior Counsel), Jacob D. Krawitz (Branch Chief), Melissa S. Gainor (Assistant Director), and Brian McLaughlin Johnson (Assistant Director), Investment Company Regulation Office, at (202) 551-6792, Kay-Mario Vobis (Senior Counsel), Daniele Marchesani (Assistant Chief Counsel), Chief Counsel’s Office, at (202) 551-6825, Division of Investment Management, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is adopting 17 CFR 270.6c-11 (new rule 6c-11) under the Investment Company Act [15 U.S.C. 80a-1 et seq.]; amendments to Form N-1A [referenced in 17 CFR 274.11A] under the Investment Company Act and the Securities Act of 1933 [15 U.S.C. 77a et seq.] (“Securities Act”); and amendments to Forms N-8B-2 [referenced in 17 CFR 274.12] and N-CEN [referenced in 17 CFR 274.101] under the Investment Company Act.1 The Commission also is adopting technical amendments to Form N-CSR [referenced in §274.128], Form N-1A, Form N-8B-2, and Form N-PORT [referenced in § 274.150] under the Investment Company Act, and 17 CFR 210.12-01 through 210.12-29 (Article 12 of Regulation S-X). TABLE OF CONTENTS I. Introduction .....................................................................................................................5 A. Overview of Exchange-Traded Funds ..........................................................................9 B. Operation of Exchange-Traded Funds ....................................................................... 11 1 Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all references to rules under the Investment Company Act are to title 17, part 270 of the Code of Federal Regulations [17 CFR part 270]. 2 II. Discussion ..................................................................................................................... 15 A. Scope of Rule 6c-11 .................................................................................................. 18 1. Organization as Open-End Funds ............................................................................. 18 2. Index-Based ETFs and Actively Managed ETFs ...................................................... 21 3. Leveraged/Inverse ETFs .......................................................................................... 26 B. Exemptive Relief under Rule 6c-11 ........................................................................... 33 1. Treatment of ETF Shares as “Redeemable Securities” ............................................. 34 2. Trading of ETF Shares at Market-Determined Prices ............................................... 39 3. Affiliated Transactions ............................................................................................. 42 4. Additional Time for Delivering Redemption Proceeds ............................................. 46 C. Conditions for Reliance on Rule 6c-11 ...................................................................... 51 1. Issuance and Redemption of Shares ......................................................................... 52 2. Listing on a National Securities Exchange ............................................................... 59 3. Intraday Indicative Value (“IIV”) ............................................................................. 61 4. Portfolio Holdings Disclosure .................................................................................. 67 5. Baskets .................................................................................................................... 80 6. Website Disclosure .................................................................................................. 96 7. Marketing .............................................................................................................. 115 8. ETF and ETP Nomenclature .................................................................................. 116 D. Recordkeeping ........................................................................................................ 118 E. Share Class ETFs .................................................................................................... 121 F. Master-Feeder ETFs ................................................................................................ 125 G. Effect of Rule 6c-11 on Prior Orders ....................................................................... 129 H. Amendments to Form N-1A .................................................................................... 133 1. Fee Disclosures for Mutual Funds and ETFs (Item 3)............................................. 134 2. Disclosures Regarding ETF Trading and Associated Costs (Item 6) ....................... 135 3. Eliminated Disclosures .......................................................................................... 144 I. Amendments to Form N-8B-2 ................................................................................. 145 J. Amendments to Form N-CEN ................................................................................. 147 K. Technical and Conforming Amendments to Form N-1A, Form N-8B-2, Form N-CSR, Form N-PORT, and Regulation S-X .............................................. 148 L. Compliance Dates ................................................................................................... 150 III. Other Matters .............................................................................................................. 150 IV. Economic Analysis ...................................................................................................... 151 A. Introduction ............................................................................................................. 151 B. Economic Baseline .................................................................................................. 154 1. ETF Industry Growth and Trends ........................................................................... 154 2. Exemptive Order Process and Certain Conditions under Existing Orders ............... 156 3. Market Participants ................................................................................................ 159 4. Secondary Market Trading, Arbitrage, and ETF Liquidity ..................................... 163 C. Benefits and Costs of Rule 6c-11 and Form Amendments ....................................... 168 1. Rule 6c-11 ............................................................................................................. 168 2. Amendments to Forms N-1A, N-8B-2, and N-CEN ............................................... 190 D. Effects on Efficiency, Competition, and Capital Formation ..................................... 193 1. Efficiency .............................................................................................................. 193 2. Competition ........................................................................................................... 197 3 3. Capital Formation .................................................................................................. 199 E. Reasonable Alternatives .......................................................................................... 199 1. Website Disclosure of Basket Information ............................................................. 199 2. Disclosure of ETF Premiums or Discounts Greater than 2% .................................. 201 3. Website and Prospectus Disclosure of the Median Bid-Ask Spread Calculated Over the Most Recent 1-Year Period ...................................................................... 203 4. Additional Disclosures Showing the Impact of Bid-Ask