Securities Regulation Daily Wrap Up, BROKER-DEALERS—House passes bill to create safe harbor for research on ETFs, (Apr 29, 2016)
The House of Representatives has passed a bill that would direct the SEC to create a safe harbor for investment research reports that cover exchange-traded funds (ETFs). The proposed legislation, whose working title is the Fair Access to Investment Research Act of 2016, is similar to a bill that passed the House last year as part of the Capital Markets Improvement Act.
Current law. Under existing law, issuers are prohibited from offering securities for sale without filing a registration statement with the SEC. Under Securities Act Section 5, investment research reports technically can be considered an “offer,” thereby triggering the registration requirements.
The SEC has created safe harbors for research reports covering many asset classes, but not for ETFs. As a result, broker-dealers have been reluctant to issue investment research on ETFs despite the rapid growth in that market. The bill, which passed by a vote of 411 to 6, would establish a safe harbor to allow broker-dealers to issue ETF research reports without those reports being considered an offering of shares of the ETFs.
Safe harbor conditions. To be eligible for the safe harbor, a broker or dealer must distribute the research report in the regular course of business. In addition, the report must relate to an ETF issuer that has a class of securities listed on a national securities exchange for at least 12 months prior to the publishing or distribution of the report. The ETF issuer also must have an aggregate market value of at least $75 million, and must be either a unit investment or an open-end company or a trust whose assets consist primarily of interests in commodities, currencies, or derivative instruments referring commodities or currencies.
In a press release, Rep. French Hill (R-Ark), the bill’s co-sponsor, urged the Senate to quickly pass the legislation. He noted that since starting an investment firm in the late 1990s, he has seen the ETF market grow from 100 funds with $100 billion in assets to more than 1,400 funds with $2 trillion in assets. The bill would promote capital formation by improving investor access to information about ETFs, he said.
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