Are ETFs Reportable Securities?

As a compliance officer for a registered investment adviser, you need to verify transactions where the account has a “reportable security” to make sure your employees are not violating your insider trading policy. That means checking you employees’ securities accounts at least quarterly. You’re compelled by Rule 204A-1 (b)(2) to do this for access persons.

The big exclusions from the definition of reportable security are US Treasuries and open-end mutual funds (assuming they are not funds where you act as the investment adviser).

The question I had was how Exchange Traded Funds fit into that definition. Index funds fit into the open end fund exclusion. Exchange Traded Funds act sort of like index funds so should they be reportable securities?

The answer turns out to be yes and no.

National Compliance Services asked this same question in 2005, shortly after Rule 204A-1 came out.

ETFs are structured as either an open-end fund or a unit investment trust. The SEC’s response in a no action letter was that the open-end fund variety is not a reportable security and the UIT variety is a reportable security.

Is the UIT variety of ETF rare enough that you don’t need to worry about them? No. Actually, it’s the opposite. Some of the largest ETFs are Unit Investment Trusts: SPY, QQQ, DIA and MDY. That means you should probably just through all ETFs under the “reportable securities” label.


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