Can two affiliated ETFs merge in reliance on Rule 17a-8 under the Investment Company Act despite representations they made to obtain exemptive relief from the Commission? That’s the question addressed in a recent Guidance Update from the Division of Investment Management.
Among the standard representations required by the SEC to grant exemptive relief necessary to operate an ETF is that each ETF will issue and redeem its shares solely in creation units through authorized participants in exchange for a previously published “basket” of instruments and/or cash. This seems to preclude ETFs from relying on Rule 17a-8, since under the rule an acquired ETF would transfer substantially all of its assets to an acquiring ETF in return for the acquiring ETF issuing interests (not necessarily in creation units) to the shareholder of the acquired ETFs. Authorized participants would not be part of the transaction at all.
The staff noted that exemptive orders granted to date do not contemplate the merger of affiliated ETFs, and therefore do not address the specifics of a merger relying on the Rule 17a-8 exemption. But, to rely on Rule 17a-8, the ETFs would have to comply with certain disclosure, registration, shareholder approval and other requirements designed to protect the merging ETFs and their shareholders. As a result, the staff would not recommend enforcement to the Commission if two affiliated ETFs proposed to merge in reliance on, and in compliance with, Rule 17a-8.
This relief is welcome, but narrow: other types of corporate reorganizations (including, for example, the conversion of an open-end fund into an ETF) might yield different results.