PALM DESERT, Calif. – While speculation on the first actively- managed fund has focused on when one will be introduced and who will be the first to offer such a product, the Securities and Exchange Commission is seeking the industry’s help in figuring out how an actively-managed exchange-traded fund will work.

The SEC is preparing to issue a concept release seeking the fund industry’s comments and ideas on the development of an actively- managed exchange-traded fund, said Paul Roye, the SEC’s director of investment management. Roye made his comments here at a conference sponsored by the Investment Company Institute of Washington D.C. and the Federal Bar Association, also of Washington. The SEC is trying to determine what purpose such a product should serve, what cost advantages it might have and how the product would operate, he said.

One problem that needs to be addressed is portfolio transparency, he said. Existing exchange-traded funds work because their portfolios are based on a fixed index and investors know the funds’ exact holdings. Also, short-selling and arbitrage activity keeps exchange-traded funds’ prices close to net asset value, he said.

But how an actively-managed exchange-traded fund would have a level of transparency that gives investors enough information to trade in and out of the fund without triggering front-running needs to be addressed, he said.

Also, the development of an actively-managed exchange-traded share class could have a harmful effect on how investors invest in mutual funds, Roye said.

'If you have people buying the regular class of shares and you have an actively-managed class of shares and people start selling short, psychologically, what is that going to do?' he said. 'Is it going to encourage people to trade funds on a short-term basis?'

By issuing a concept release, the SEC hopes to be well prepared when a firm actually files an exemption request for an actively- managed exchange-traded fund, he said.

'The idea is to just get information,' he said. 'We’ll be better informed when we actually do have to start dealing with these issues, so it is kind of a preemptive strike.'

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