(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

SEC Proposes Measures on ETFs, Naked Short Sales and Privacy

The SEC proposed new rules that would eliminate the need for certain exchange-traded funds to seek individual exemptive relief before going to market. A second proposal targets abusive naked short selling by adding a new antifraud rule. A third proposal would amend Regulation S-P to provide more detailed standards for information security programs and to permit the limited disclosure of personal information when representatives move from one broker-dealer or investment adviser to another.

The proposed ETF rules would codify most of the exemptions that have previously been granted to index-based ETFs and more recently to several actively managed ETFs. There are currently about 600 ETFs which hold approximately $600 billion in assets. These funds, which are similar to mutual funds, are increasingly used by retail investors.

Under the rules, an ETF could go to market without seeking exemptive relief as long as its portfolio is transparent and it trades through a national securities exchange that discloses trading prices throughout the day. The Commission proposes to amend Form N-1A to permit ETFs to provide more useful information.

The SEC proposes to allow investment companies to make larger investments in ETFs than the currently-allowed three percent. A "fund of funds" would not be permitted to acquire control of an ETF and may not redeem shares in excess of three percent. The ETF cannot be a fund of funds. In order to avoid any duplicative fees, the funds would be subject to the FINRA sales charge limits.

The proposed short selling antifraud rule would consider it a manipulative or deceptive device if a person, when submitting an order to sell a security, deceives a broker-dealer, a participant of a registered clearing agency, or a purchaser about its intention or ability to deliver securities on the due date or fails to deliver the security on the due date. Chairman Christopher Cox said there is ample evidence of fraud in the market, despite the adoption of Regulation SHO in 2004 to address concerns with fails to deliver and abusive naked short selling. Regulation SHO needs teeth, he said, and this proposal provides them.

Some short sellers deliberately misrepresent their "locate source" for securities to be delivered and some misrepresent that they own the shares being sold. Regulation SHO failed to significantly reduce the fails to deliver, according to David Sirri, the director of the Division of Trading and Markets. Commissioner Paul Atkins said he shares investors' concerns about naked short selling, but such abuses are covered by Rule 10b-5. Mr. Atkins acknowledged that proposed Rule 10b-21 puts people on notice, which may be valuable, but he questioned whether it would make some reluctant to engage in legitimate short selling. He questioned whether the proposed rule is necessary, but expressed willingness to seek comments.

The proposed amendments to Regulation S-P reflect a number of changes in Internet technology since its 2000 adoption. Regulation S-P outlines the privacy obligations of entities that are regulated by the SEC. Under the SEC's proposal, these entities would be subject to more stringent requirements for safeguarding information and for responding to information security breaches.

The comment period on the proposals will be open for 60 days.