SEC To Allow Derivatives In Active ETFs

December 06, 2012


Marquee Managers To Benefit

Moreover, the ruling won’t necessarily change the difficulty active ETFs are having in gaining market share, but it will help fund companies with brand-name managers like Gross gain a measure of flexibility in how they run their active portfolios in an ETF wrapper.

“The lifting of the ban on active management isn't likely to be a floodgate,” said Dave Nadig, Director of Research at IndexUniverse in an interview.

“The real deal in active management would be the entry of traditional players with 'brand track record' that could make up for a lack of a real track record,” Nadig added, noting however that the ban on derivatives hasn’t really discouraged huge players like Fidelity from rolling out funds.

"I don't think the active ban has kept anyone from ETFs. The transparency of ETFs and fee erosion has,” he said, adding that the lifting of the band may well encourage existing active ETFs to use simple derivatives such as futures to equitize small portions of their portfolios for tracking purposes.

He also noted that the fact that the SEC continues to balk at the idea of approving new funds that use derivatives in leveraged and inverse funds isn’t a big deal as the pocket is already inhabited and pretty much covered by ProShares, Direxion and iPath, the exchange-traded note firm backed by UK-based Barclays Plc.

The Background

The SEC review applied to actively managed and leveraged ETFs, particularly those that plan to use swaps and other derivative instruments to achieve investment objectives.

It never affected firms that already had permission to use derivatives, much to the frustration of ETF sponsors who felt they were caught in the wrong place at the wrong time.

Specifically, the SEC inquiry precluded the approval of any pending or planned “exemptive relief” petition seeking permission to market funds making use of derivatives.

Exemptive relief grants ETF firms exception to sections of the Investment Act of 1940 and is 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, though the SEC inquiry has left petitions languishing at the commission for more than 2 1/2 years.

Champ’s speech was at the ALI CLE 2012 Conference on Investment Adviser Regulation today in New York.



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