SEC addresses IPOs, ETFs, and retail investor protections

By Ken Tysiac

The SEC on Thursday adopted separate new rules allowing all issuers to "test the waters" for initial public offerings (IPOs) and modernizing regulation of exchange-traded funds (ETFs) while also proposing amendments designed to enhance protections for retail investors.

One of the new rules extends to all issuers the "test-the-waters" accommodation, which previously had been available only to emerging growth companies.

The rule will allow all issuers to gauge market interest in a possible IPO or other registered securities offering. Gauging market interest is accomplished through discussions with certain institutional investors before or after the filing of a registration statement.

"Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings," SEC Chairman Jay Clayton said in a news release.

The rule will take effect 60 days after publication in the Federal Register.

Exchange-traded funds

The other new rule and form amendments are designed to modernize the regulation of ETFs by establishing a clear and consistent framework for the vast majority of ETFs that are currently operating.

The rule was created to facilitate greater competition and innovation in the ETF marketplace that could lead to more choices for investors. The rule also is designed to help ETFs come to market more quickly without the time or expense of applying for individual exemptive relief.

The SEC also voted to issue an exemptive order that further harmonizes related relief for broker-dealers.

ETFs are hybrid investment products with shares trading on an exchange like a stock. But ETFs also allow identified large institutions to transact directly with the fund. Today there are approximately 2,000 ETFs with more than $3.3 trillion in total net assets, according to the SEC.

ETFs relying on the rule and the related exemptive order will be required to comply with certain conditions designed to protect investors, including transparency and disclosure rules. The rule and form amendments will take effect 60 days after publication in the Federal Register, with a one-year transition period for compliance with the form amendments.

Investor protection proposal

The proposal issued Thursday would establish requirements for broker-dealers to meet before they can publish quotations for securities in the over-the-counter (OTC) market. The proposed amendments are designed to:

  • Facilitate the availability of current issuer information;
  • Limit certain exceptions to provide more protection for investors; and
  • Reduce burdens for broker-dealers with proposed new exceptions where there is less concern regarding fraud and manipulation.

Public comments will be accepted at the SEC's website for 60 days following publication of the proposal in the Federal Register.

Ken Tysiac ( is the JofA's editorial director.

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