A statutory principal underwriter, often referred to as the distributor, is perhaps one of the most underrated roles and is often overlooked in the ETF formation process. While it may become the last piece of the puzzle trusts put in place, it should be determined around the same time as the ETF’s custodian and transfer agent, along with the listing exchange for trading.
If a firm has its own registered broker-dealer (“BD”), that doesn’t necessarily mean it can be the statutory principal underwriter and distributor for ETFs. There are a whole host of reasons that we will highlight at a high level in consideration of requisite rules, regulations and guidance issued by the Depository Trust and Clearing Corporation (“DTCC”), National Securities Clearing Corporation (“NSCC”), U.S. Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority, Inc. (“FINRA”).
The distributor is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934, as amended (“1934 Act”) and is a member of FINRA. To facilitate purchase and redemption orders for creation units issued by ETFs, the distributor is a member of the Depository Trust Company (“DTC”) and NSCC. Such membership maintenance and the initial membership process can be cumbersome and costly. Accordingly, this may be a significant factor in a firm’s determination as to whether to self-distribute ETFs (i.e., through an affiliated or proprietary BD) or utilize a third-party distributor (such as SS&C ALPS) with an established infrastructure to distribute, as well as facilitate orders, for ETFs. SS&C ALPS also has an extensive and longstanding repository of Authorized Participant (“AP”) agreements with AP firms that serve as lead market makers, market makers and institutional order managers which, coupled with firmly founded AP relationships, streamline the process for efficient legal contract negotiation and operational set-ups for ETF order management.
As mentioned, the distributor serves as the principal underwriter of ETFs for the creation and redemption of creation units issued by ETFs and negotiates and enters into AP agreements with AP firms, whereby the trust is a third-party beneficiary, for the ETFs to be distributed. The distributor manages the end-to-end order flow in the primary market, by reviewing and approving all creation and redemption orders, either on the SS&C ALPS proprietary order entry platform or such other platform supported by the ETF’s designated transfer agent/custodian. This is a critical component of the issuance process because the secondary or retail market for ETFs must be preceded by primary market activity (i.e., APs and market makers creating creation units for availability on the ETF’s selected listing exchange).
In addition, all ETF advertising, marketing and sales materials that will be utilized to market and sell the ETF must be reviewed and approved through our proprietary portal by one or more of the distributor’s FINRA-licensed principals; specifically, one that has a FINRA Series 24 or Series 26. Such materials include, but are not limited to, website pages, fact sheets and even social media posts. The distributor will also file any such materials according to the requirements set forth by FINRA.
Key factors you may want to consider when selecting a third-party distributor:
- What is your firm’s experience with ETFs?
- How long have you been in the business?
- What is the firm’s advertising and sales material review process and review platform like?
- Is the review automated and/or part of the FINRA batch submission program?
- What does your FINRA comment library look like for ETF products? Is it extensive concerning longevity in the industry?
- Will the distributor take an active role in reviewing your registration statement before filing with the SEC?
- Are they actively involved in your product launch with the transfer agent, APs and market makers?
- Are they proactive in the review and approval of creation and redemption orders?
- What are their policies and procedures regarding the licensing of registered representatives? Are there licenses they won’t hold and why?
- Do they have partnerships for your active distribution strategy?
Partner with us and find out why we can make a difference as your distributor, principal underwriter, and as a firm servicing the ETF marketplace for more than 30 years with over $916B in ETF assets under distribution and an extensive library.
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