SEC To Allow Derivatives In Active ETFs

By
Olivier Ludwig and Paul Amery
December 06, 2012
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The SEC finally makes a move on derivatives in ETFs, saying it will no longer block their use in active funds.

 

Fund companies looking for regulator permission to include derivatives in active ETFs will no longer have the Securities and Exchange Commission standing in their way—in the first tangible outcome of an SEC review of derivatives use in mutual funds and ETFs that began in March 2010.

The commission didn’t say it was lifting the moratorium on new leveraged and inverse funds, but the ruling that will allow derivatives in active funds could have a quick effect on popular active ETFs such as Bill Gross’ $3.83 billion Pimco Total Return ETF (NYSEArca: BOND) that can’t currently make use of derivatives.

“Although the Division continues its ongoing review of the use of derivatives by funds, Division staff will no longer defer consideration of exemptive requests under the Investment Company Act relating to actively managed ETFs that make use of derivatives,” Norm Champ, the Director of the SEC’s Division of Investment Management, said today in prepared remarks during a conference in New York.

While Champ didn’t officially close the inquiry, he framed the question of the SEC’s position on leverage and inverse funds in such a manner as to suggest that perhaps those firms hoping to get a piece of a business dominated by Bethesda, Md.-based ProShares and Newton, Mass.-based Direxion ought not hold their breath for an SEC change of heart.

“Because of concerns regarding leveraged ETFs, however, we continue not to support new exemptive relief for such ETFs,” Champ said.

That’s important because derivatives use in leveraged and inverse funds “were at the root of the moratorium originally,” said Kathleen Moriarity, a New York-based securities lawyer with Katten Muchin Rosenman LLP who has written countless ETF prospectuses, including the one for the first U.S. fund, the now $110 billion SPDR S&P 500 ETF (NYSEArca: SPY).

 

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