he SEC's current apprehension revolves around the unconventional use of a C-Corporation (C-Corp) business structure by certain exchange-traded funds (ETFs). Traditionally, ETFs are structured as open-end funds or unit investment trusts, in line with Rule 6c-11 of the Investment Company Act of 1940—commonly known as "the ETF rule." This rule was implemented to streamline the creation and operation of ETFs, ensuring consistency, transparency, and investor protection across the industry.
However, the adoption of a C-Corp structure by these funds deviates from the norm and introduces regulatory complications. C-Corps are typically used by traditional operating companies, not investment vehicles like ETFs. This structure can affect the fund’s tax treatment, disclosure obligations, and how it interacts with authorized participants in the ETF ecosystem. More importantly, the SEC is concerned that such a structure might bypass key safeguards embedded in Rule 6c-11, potentially creating unequal conditions in the market and reducing the level of investor protection.
While some fund issuers argue that the C-Corp model provides certain tax advantages—especially when dealing with commodities or alternative assets—the SEC is scrutinizing whether these benefits come at the expense of regulatory clarity and investor trust. As a result, funds using or proposing this structure face heightened regulatory review and uncertainty regarding approval.