Dechert Paves Way For Improved ETF Regulations

April 27, 2017

Regulatory Expertise & Experienced Team
Dechert has depth in two areas, Senderowicz says. First, there’s the depth of high-level regulatory practical expertise that a sponsor would expect from law firm partners. Second is a deep practice and groups of associates that do a great deal of ETF work. He notes that having both at one firm is unusual.

Because Dechert has been in the ETF industry since its infancy, Strauss and Senderowicz say clients understand that the firm has the legal practical knowledge to give advice.

“We have such a large diversified practice; we see everything in the industry. So when clients have a question—how to do this, is this permissible—we can give quick, practical responses. It’s not necessary to go back and do research on a lot of things. We can get back to clients quickly and efficiently. We’re known for that,” Strauss explained.

The firm has worked on a number of novel ETF products that have become precedents. When a firm approaches Dechert with a first-of-its-kind idea, there are a number of issues to be addressed.

“The challenges that we face in that regard are, No. 1, is this the sort of strategy that can be translated into specific objective rules; is this really a rules-based approach? Is it permissible under the exemptive application?” Strauss said.

Senderowicz says that whenever a sponsor wants to create an ETF out of a new type of asset or asset class, Dechert has had to work with the sponsor’s clients and the regulators extensively. Not only must they persuade the regulators whether the fund is consistent with exemptive relief, they must convince the markets that the assets in question are liquid and transparent enough to support an ETF based on that asset class.

One novel ETF Dechert worked on was the ALPS Alerian MLP ETF (AMLP). Strauss says under the 1940 Investment Act, if a fund invests more than 25% of its assets in master limited partnerships, it doesn’t qualify for pass-through tax treatment under the Internal Revenue Service code; instead, it’s taxed as a corporation.

Dealing with an MLP ETF based on an index presented unique issues, Strauss says. For all fund shareholders to bear their fair share of gains once those positions are distributed, AMLP effectively accrues a deferred tax liability every day—to the extent there are gains in the fund—which is deducted from the fund’s net asset value daily.


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