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MANILA - The Securities and Exchange Commission has released the draft rules for exchange-traded funds.
In a notice posted on its website, SEC said it is soliciting comments from market participants and interested parties on the proposed ETF rules until August 6.
The regulator defines an ETF, considered as the world's fastest-growing asset class, as an "open-end investment company that continuously issues and redeems its shares of stock in creation unit in exchange for basket of securities and representing an index whose performance the ETF endeavors to track."
The draft rules require the incorporation of ETF companies in accordance with the Investment Company Act and the registration of ETF shares under the Securities Regulation Code.
An ETF applying for incorporation should have a minimum paid-up capital of P250 million and all its shares should be common, voting and redeemable in creation unit in accordance with the terms and conditions prescribed and disclosed in its registration statement.
The pre-emptive right of stockholders to all issues or disposition of shares in proportion to their respective shareholdings will be defined in the ETF's Articles of Incorporation.
All members of the board of directors should be Filipino citizens.
The rules require an ETF to explicitly state in the registration statement its investment objectives and define what types of securities it will invest in. A newly- formed ETF will not change its investment objectives and policies in the first three years unless approved by the shareholders representing at least a majority of the outstanding capital stock in a meeting.
To ensure liquidity of the shares, the rules mandate the appointment of a market maker and listing of ETF shares in an exchange. The net asset value will be calculated in a transparent manner and made available to the investing public by publishing it in the exchange board and website and on the website of the ETF or such other location.
As a general rule, ETF shares will be issued only upon delivery by the authorized participant of the basket of securities underlying an index, or redeemed, by delivering to the authorized participant the basket of securities after surrender of the ETF shares.
In exceptional cases, an ETF may allow the issuance of ETF shares in exchange for cash subject to certain conditions.
An ETF shall enter into an agreement with an index provider before using the index designed, constructed and calculated by said index provider. It shall identify and fully describe the index that it plans to track and the provider of said index.
It will provide in its registration statement the composition of the index and the corresponding weights; methodology used in the selection of the securities comprising the index and the rationale; methodology used in the calculation of the index and the rationale; name and brief educational and professional background of the owners, directors, officers and persons directly responsible for the design and review of the index; and, other indices designed, constructed and calculated by the index provider, current and for the last five years, if any.
An ETF shall appoint a fund manager, which will be registered as an investment company adviser in accordance with the requirements of the ICA. Majority of the directors and officers of the fund management company shall have a track record of at least five years in managing funds.
An ETF or its appointed fund manager will appoint one or more authorized participants which shall directly participate in the issuance and redemption of ETF shares; a custodian which shall take custody and control of the ETF assets and properties; a registered transfer agent which shall maintain an accurate registry for recording the initial and subsequent transfer of shares.
The proposed rules are issued pursuant to the ICA. Its standards include regular public disclosure of finances, investment policies and objectives, and fund portfolios as well as the companies’ pricing and fees.
The rules will take effect 15 days after the date of last publication in two newspapers of general circulation in the Philippines.
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