Alert March 04, 2008

SEC Votes to Propose Exemptive Rules Relating to ETFs and to Amend Privacy Rules

At its open meeting today the SEC voted to propose (a) exemptive rules under the Investment Company Act of 1940, as amended, that would allow exchange traded funds (“ETFs”) to operate without first obtaining individual exemptive orders from the SEC, and (b) additional provisions under Regulation S-P that would (i) specify more detailed information security standards, (ii) update the Regulation’s safeguarding and disposal provisions and (iii) create a new exception to permit the disclosure of limited personal information when representatives move from one broker-dealer or registered investment adviser to another.  This article summarizes information provided in SEC press releases announcing these developments.  More extensive coverage will appear in the Alert once the SEC issues formal proposing releases.

ETF Exemptive Rules.  The SEC’s ETF proposal would codify exemptions previously granted by the SEC to index based ETFs and, in several recently issued exemptive orders, to certain actively managed ETFs (see the next story in this issue which discusses those exemptive orders).  The proposal would also allow investment companies to make larger investments in ETFs than would otherwise be permitted under 1940 Act’s limitations on investments by other investment companies in registered funds.  The SEC’s ETF proposal also includes amendments to Form N‑1A, the registration form for open-end management investment companies, that are designed to facilitate the use of the Form by ETFs to provide information to secondary market purchasers of their shares.  

Privacy Rule Amendments.   The proposed amendments would provide more specific requirements for safeguarding information and responding to information security breaches, and update Regulation S-P’s safeguarding and disposal provisions.  In addition, they would extend the application of the disposal provisions to individuals associated with brokers, dealers, SEC-registered investment advisers and SEC-registered transfer agents, and would extend the application of the Regulation’s safeguarding provisions to SEC-registered transfer agents.  The proposed amendments would also permit a limited transfer of customer information without the notice and opt out required by Regulation S-P when personnel move from one broker-dealer or registered investment adviser to another.

The comment period for each proposal will end 60 days from the date of the proposal’s publication in the Federal Register.