SEC Comment Letter for EXCHANGE TRADED CONCEPTS TRUST (CIK 0001452937) — Feb 4, 2020
EXCHANGE TRADED CONCEPTS TRUST (CIK 0001452937)
Date: Feb. 4, 2020 · CIK: 0001452937 · Accession: 0000000000-20-001051
AI Filing Summary & Sentiment
File numbers found in text: 333-156529, 811-22263
Letter
February 3, 2020
Magda El Guindi-Rosenbaum Morgan, Lewis & Bockius, LLP 1111 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Re: Exchange Traded Concepts Trust SEC File Numbers: 333-156529; 811-22263 Dear Ms. El Guindi-Rosenbaum: We have reviewed the post-effective am endment filed on January 3, 2020, pursuant to Rule 485(a) under Securities Act of 1933 (the “Securities Act”), to the registration statement on Form N-1A of the Exchange Traded Concepts Trust (the “Trust”). The purpose of this filing is to change the name of the Trust’s FLAG-For ensic Accounting Long-Short ETF to North Shore Dual Share Class ETF (the “ETF”) as well as entirely change its investment objective, investment policies a nd principal investment practices , and portfolio managers. Our comments are set forth below. The capti ons we use below correspond to the captions the Trust uses in its registration statement. Where a comment is made in one location, it is applicable to all similar disclosure elsewhere in the registration statement. Given the significance of the issues raised in this letter, we expect the Trust to delay the effectiveness of the registration statement until all of the comments in this letter are resolved.
Prospectus
General Comments
We note that the ETF has completely ch anged its investment strategies. These wholesale changes are accompanied by other si gnificant changes, including a dropping of a subadvisor resulting in new portfolio managers and a transition from an affiliated index to an unaffiliated index. We have the following comments concerning these changes: 1. Please supplementally inform the staff why the Board of Trustees believes these changes are consistent with its fiduciary duties and are in the best interests of its shareholders -- who did not vote for th ese changes. In your response:
a. Explain in detail what information the Board considered, and how it weighed the information in arriving at its decision. b. Explain in detail why the Board conclude d that this approach was better for shareholders than other alternatives, su ch as liquidating the ETF and starting a new ETF. c. Support your explanation of the Board’s delib erations with data. For example, if cost was a consideration, provide data on the expected cost savings from the proposed changes, as compared with starting a new ETF. 2. Please also explain why the Adviser believes these change are consistent with its fiduciary duty to this ETF. 3. Has the Trust and ETF notified its sharehol ders of this planned change? If so, please provide the staff with a copy of the notice and when and how ( e.g., letter, e-mail) it was sent. If not, when will the Trust and ETF distribute such a notice and how?
4. What is the composition of th e ETF’s shareholder base ( e.g., affiliated v. unaffiliated, retail v. institutional, domestic v. foreign)? What percentage of the ETF’s shares are held by retail investors?
5. Please explain in your response why maki ng these changes in a post-effective amendment to the registration statement of an existing ETF, as opposed to an amendment adding a new ETF, is consiste nt with the text and policy of Rule 485(a) under the Securities Act. Explain why you believe this does not provide an unfair competitive advantage over other registrants, which add new series under Rule 485(a) that go effective with in 75 days (as opposed to 60 days).
6. Please inform the staff in your respons e letter what percentage of the ETF’s current portfolio needs to be re-pos itioned as a result of these changes.
7. Have any shareholders (including Authoriz ed Participants) contacted the Trust or ETF or intermediaries about this planned tran saction? If so, describe the nature of such communications including whether anyone has expressed displeasure or disagreement with the planned trans action or threatened legal action.
Fees and Expenses
8. Please furnish the staff with a completed f ee table (including the example) as soon as possible, but no later than one full week before th is post-effective amendment becomes effective. In your response letter to the staff, graphically portray how these fees and expenses compare to the fees and expenses before the changes to th e investment strategies. We may have further comments.
Principal Investment Strategies
9. Disclose how many companies currently comprise the Index.
Principal Risks
10. Please list your principal risks in order of importance, with the most significant risks appearing first. See ADI 2019-08 – Improving Principal Risks Disclosure , available at: https://www.sec.gov/investment/accounting-and-di sclosure-information/pr incipal-risks/adi-2019- 08-improving-principal-risks-disclosure .
14. Dual Share Class Companies Risk – Pleas e amplify the risk disclosure to make it clear that the ETF would only be a common stock holder of such companies and it would not be able to enjoy the voting rights it would have if it were invested in ordi nary stock companies. Also, please consider whether the historical performance of dual class companies, as compared to traditional single class companies, presents a principal risk that should be disclosed to investors. Please also consider whether there are any relevant regulatory risks with respect to dual class companies that are principa l risks that should be disclosed. 15. New/Smaller Fund Risk – This risk factor should be tailored specifically to this ETF. For example, explain to us why a Fund that has been operating for more than five years should still be considered “new”? 16. Are there enough companies in the Inde x to allow the ETF to have a diversified portfolio? If not, include a discussion of the risk of non-diversification, or explain to us why you believe such disclosure in not appropriate.
Performance Information
17. The first sentences of the second paragraph of this section should be in bold. 18. Please provide a concise description of the changes in the principal investment strategies and a caveat to the effect that the changes are so sweeping that this performance data is of very limited use. 19. In the second sentence of the second paragraph, change “may” to “would”. 20. Please explain in your response letter to the staff why “the Russell 3000 Index was determined to be a more appropriate index in light of the changes to the Fund’s investment objective and strategies.” In your response, please compare the performance of the S&P 500 to the Russell 3000 Index over 1 and 5 year periods, and since the ETF’s inception.
Index Information/Trademark License/Disclaimers
21. Please furnish the staff with the full index methodology.
22. Please include as exhibits to the regi stration statement the license and sub-license agreements pursuant to Item 28(h) of Form N-1A. Fund Management
23. Please inform the staff whether the ETF has any present intention to employ a sub- adviser.
Statement of Additional Information
Information about Investment Policies, P ermitted Investments, and Related Risks
24. Some investments descri bed here are not mentioned in the Trust’s prospectus. To the extent that the Fund intends to invest in such investments so that they might materially affect the performance of the Fund or the decisi on of an investor to purchase its shares, such investments, and their accompanying risks, should be discussed in the prospectus.
We note that portions of the filing are incomplete. We may have additional comments on such portions when you complete them in a pr e-effective amendment, on disclosures made in response to this letter, on info rmation provided supplementally, or on exhibits added in any pre- effective amendment. We remind you that the Trust and its manage ment are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff. Please contact the undersigned at ( 202) 551-6961 should you have any questions regarding this letter. S i n c e r e l y ,
/s/ John Grzeskiewicz
John Grzeskiewicz Senior Counsel
Show Raw Text
February 3, 2020
Magda El Guindi-Rosenbaum Morgan, Lewis & Bockius, LLP 1111 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Re: Exchange Traded Concepts Trust SEC File Numbers: 333-156529; 811-22263 Dear Ms. El Guindi-Rosenbaum: We have reviewed the post-effective am endment filed on January 3, 2020, pursuant to
Rule 485(a) under Securities Act of 1933 (the “Securities Act”), to the registration statement on
Form N-1A of the Exchange Traded Concepts Trust (the “Trust”). The purpose of this filing is to change the name of the Trust’s FLAG-For ensic Accounting Long-Short ETF to North Shore
Dual Share Class ETF (the “ETF”) as well as entirely change its investment objective, investment policies a nd principal investment practices , and portfolio managers.
Our comments are set forth below. The capti ons we use below correspond to the captions
the Trust uses in its registration statement. Where a comment is made in one location, it is
applicable to all similar disclosure elsewhere in the registration statement. Given the significance of the issues raised in this letter, we expect the Trust to delay the effectiveness of the registration statement until all of the comments in this letter are resolved.
Prospectus
General Comments
We note that the ETF has completely ch anged its investment strategies. These
wholesale changes are accompanied by other si gnificant changes, including a dropping of a
subadvisor resulting in new portfolio managers and a transition from an affiliated index to an unaffiliated index. We have the following comments concerning these changes:
1. Please supplementally inform the staff why the Board of Trustees believes these
changes are consistent with its fiduciary duties and are in the best interests of its shareholders -- who did not vote for th ese changes. In your response:
2
a. Explain in detail what information the Board considered, and how it weighed the
information in arriving at its decision.
b. Explain in detail why the Board conclude d that this approach was better for
shareholders than other alternatives, su ch as liquidating the ETF and starting a
new ETF.
c. Support your explanation of the Board’s delib erations with data. For example, if
cost was a consideration, provide data on the expected cost savings from the
proposed changes, as compared with starting a new ETF.
2. Please also explain why the Adviser believes these change are consistent with its
fiduciary duty to this ETF.
3. Has the Trust and ETF notified its sharehol ders of this planned change? If so,
please provide the staff with a copy of the notice and when and how ( e.g., letter,
e-mail) it was sent. If not, when will the Trust and ETF distribute such a notice and how?
4. What is the composition of th e ETF’s shareholder base ( e.g., affiliated v.
unaffiliated, retail v. institutional, domestic v. foreign)? What percentage of the ETF’s shares are held by retail investors?
5. Please explain in your response why maki ng these changes in a post-effective
amendment to the registration statement of an existing ETF, as opposed to an
amendment adding a new ETF, is consiste nt with the text and policy of Rule
485(a) under the Securities Act. Explain why you believe this does not provide
an unfair competitive advantage over other registrants, which add new series under Rule 485(a) that go effective with in 75 days (as opposed to 60 days).
6. Please inform the staff in your respons e letter what percentage of the ETF’s
current portfolio needs to be re-pos itioned as a result of these changes.
7. Have any shareholders (including Authoriz ed Participants) contacted the Trust or
ETF or intermediaries about this planned tran saction? If so, describe the nature of
such communications including whether anyone has expressed displeasure or
disagreement with the planned trans action or threatened legal action.
Fees and Expenses
8. Please furnish the staff with a completed f ee table (including the example) as soon as
possible, but no later than one full week before th is post-effective amendment becomes effective.
In your response letter to the staff, graphically portray how these fees and expenses compare to
the fees and expenses before the changes to th e investment strategies. We may have further
comments.
3
Principal Investment Strategies
9. Disclose how many companies currently comprise the Index.
Principal Risks
10. Please list your principal risks in order of importance, with the most significant risks
appearing first. See ADI 2019-08 – Improving Principal Risks Disclosure , available at:
https://www.sec.gov/investment/accounting-and-di sclosure-information/pr incipal-risks/adi-2019-
08-improving-principal-risks-disclosure .
14. Dual Share Class Companies Risk – Pleas e amplify the risk disclosure to make it
clear that the ETF would only be a common stock holder of such companies and it would not be
able to enjoy the voting rights it would have if it were invested in ordi nary stock companies.
Also, please consider whether the historical performance of dual class companies, as compared
to traditional single class companies, presents a principal risk that should be disclosed to
investors. Please also consider whether there are any relevant regulatory risks with respect to dual class companies that are principa l risks that should be disclosed.
15. New/Smaller Fund Risk – This risk factor should be tailored specifically to this ETF.
For example, explain to us why a Fund that has been operating for more than five years should
still be considered “new”? 16. Are there enough companies in the Inde x to allow the ETF to have a diversified
portfolio? If not, include a discussion of the risk of non-diversification, or explain to us why you
believe such disclosure in not appropriate.
Performance Information
17. The first sentences of the second paragraph of this section should be in bold.
18. Please provide a concise description of the changes in the principal investment
strategies and a caveat to the effect that the changes are so sweeping that this performance data is of very limited use.
19. In the second sentence of the second paragraph, change “may” to “would”. 20. Please explain in your response letter to the staff why “the Russell 3000 Index was determined to be a more appropriate index in light of the changes to the Fund’s investment
objective and strategies.” In your response, please compare the performance of the S&P 500 to
the Russell 3000 Index over 1 and 5 year periods, and since the ETF’s inception.
Index Information/Trademark License/Disclaimers
21. Please furnish the staff with the full index methodology.
4
22. Please include as exhibits to the regi stration statement the license and sub-license
agreements pursuant to Item 28(h) of Form N-1A.
Fund Management
23. Please inform the staff whether the ETF has any present intention to employ a sub-
adviser.
Statement of Additional Information
Information about Investment Policies, P ermitted Investments, and Related Risks
24. Some investments descri bed here are not mentioned in the Trust’s prospectus.
To the extent that the Fund intends to invest in such investments so that they might materially
affect the performance of the Fund or the decisi on of an investor to purchase its shares, such
investments, and their accompanying risks, should be discussed in the prospectus.
We note that portions of the filing are incomplete. We may have additional comments on
such portions when you complete them in a pr e-effective amendment, on disclosures made in
response to this letter, on info rmation provided supplementally, or on exhibits added in any pre-
effective amendment.
We remind you that the Trust and its manage ment are responsible for the accuracy and
adequacy of their disclosures, notwithstanding any review, comments, action or absence of
action by the staff.
Please contact the undersigned at ( 202) 551-6961 should you have any questions
regarding this letter. S i n c e r e l y ,
/s/ John Grzeskiewicz
John Grzeskiewicz
Senior Counsel