The Securities and Exchange Commission's recent proposals aimed at easing the burdens of providers bringing new exchange-traded funds to market should make new ETF launches an easier proposition while fostering even more product creativity, said investment management sources.
Last week the SEC proposed rules aimed squarely at the $569 billion and growing ETF marketplace which, at the end of January 2008, included more than 600 investment products.
"ETFs are one of the most popular innovations in pooled investments in the last quarter century," said SEC Chairman Christopher Cox in announcing the proposed regulations.
Proposed Rule 6c-11 to the Investment Company Act of 1940 would allow ETFs to operate without first having to formally obtain an individual SEC exemptive action. The new rule would codify the predominance of previously granted exemptive relief actions to new ETFs seeking to list and trade shares on an exchange.
ETFs have been required to seek such explicit exemptive relief from the SEC because ETFs, first created in 1993, do not neatly fit into the types of investments allowed under the 1940 Act which was enacted by Congress 68 years ago.
That exemptive relief process, once an agonizing nine- to 12-month waiting game has, in recent times, already been shortened to a matter of a few weeks, said Tim Meyer, ETF business manager at Rydex Investments of Rockville, Md.
Quicker to Market
That once-extensive waiting period had been a competitive disadvantage to early ETF industry participants hoping to launch their innovative new ETF before the competition.
The newly proposed regulation, the substance and language of which the SEC has not yet released for public comment, would do away with that one-off SEC ETF exemptive blessing and in most cases allow ETF sponsors to register for offering from the start. The SEC would still be required to review and green light the offerings of individual ETFs as it has been doing with ETFs from the start and for decades with mutual funds. But such broad exemptive relief would allow the regulator to focus on more novel and difficult requests.
To facilitate the registration of new ETFs, the SEC proposes to amend the standard registration form N-1A, making it applicable for ETFs as well as mutual funds. Additionally, that would now allow ETFs to also issue summary - or so-called profile - prospectuses.
Last fall the SEC re-floated the idea of allowing mutual fund sponsors to issue abbreviated summary prospectuses to investors instead of the complete versions. The comment period on the summary prospectus proposal closed two weeks ago, and the SEC staff is now examining comments and suggestions received, Cox confirmed.
The new SEC proposals include adding Rule 12d1-4, which would allow investment companies to make larger investments in ETFs than the maximum 3% now permitted. This rule is in recognition of the fact that more and more mutual funds are investing in ETFs, Cox said. Fund managers often invest in ETFs to gain exposure to a market segment or sector.
The True Regulatory Impact
The real impact of the SEC's new ETF proposals may not be fully realized until 2009, predicted W. John McGuire, partner in the investment management practice with Washington-based law firm Morgan Lewis. "This is a great step, but it's just a step," he said, noting that it will make it easier for new firms seeking to bring ETFs to market.
Also of interest is the fact that the SEC is doing away with the exemptive relief requirement for both conventional passively-managed ETFs as well as newer actively managed ETFs, McGuire said.
Earlier this month, the SEC gave permission for the introduction of actively-managed ETFs which will operate through a managed account and offer once-per-day transparency of holdings. Four ETF sponsors received regulatory approval: Barclays Global, Bear Stearns, PowerShares and WisdomTree. That means the SEC is okay with the concepts behind the operation of actively managed ETFs, at least until they are road-tested, McGuire added.
"I think we will see some additional products that seek to take full advantage of this new environment," said Bruce Lavine, president and COO of WisdomTree Investments of New York. "I think ETFs will be front and center and one of the most innovative places to be in the financial services industry."
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