Legg Yanks Derivatives From ETF Plans

ETF.com Staff
July 08, 2010

Legg Mason, in a move that looks like it’s designed to speed SEC approval of its plans to offer actively managed ETFs, has decided to nix the use of derivatives in any funds it offers.

Legg Mason, which said early this year that it planned to offer actively managed exchange-traded funds, filed new papers with the Securities and Exchange Commission that dispensed with language in an earlier filing saying it might use derivatives in ETFs it ends up marketing.

The move appears to be a way to speed up its so-called exemptive relief filing in the wake of the SEC’s decision in March to put on hold any applications by companies seeking to roll out funds that are actively managed or leveraged, particular those that include the use of derivatives in their investment strategies.

While some ETF companies are already offering actively managed equity funds, such as AdvisorShares, Legg is in a race with some of the bigger U.S. financial firms to roll out such funds, notably J.P. Morgan as well as iShares, the biggest ETF company in the world.

Although Baltimore-based Legg is sticking to its guns regarding its aim to offer actively managed funds, its change of course forgoing the use of derivatives shouldn’t hamper its efforts too much. That’s because the initial fund it is contemplating is a relatively straightforward equity fund. It might run into some challenges when the fund has to equitize cash—something funds sometimes do using options—but such needs are likely to be minimal.

Legg said in its latest filing that the first fund it hopes to offer under the exemptive relief filing will invest mainly in equity and equity-related securities, such as convertible securities and preferred stocks and warrants, of U.S. and non-U.S. companies and depositary receipts. The holdings could span the size spectrum, from small- to mid- and large-capitalization securities.

Exemptive relief filings grant the ETF firms exception to sections of the Investment Act of 1940 and are just the first step in the path to launching ETFs. It often takes at least six to 12 months from the date of the initial filing for a company’s first ETF to hit the market.

Legg, a firm exclusively associated with actively managed mutual funds, filed to offer ETFs in February. New York-based J.P. Morgan’s exemptive relief filing came about a month later, while San Francisco-based iShares submitted its paperwork to the SEC last month.


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