Will Obama's Regulatory Overhaul Include ETFs?

June 17, 2009

The regulatory maze for commodity funds is costing managers time and money. Now it's starting to impact investors directly.


The unveiling of new regulations for the financial services industry on Wednesday is likely to find some very anxious observers among exchange-traded fund investors and sponsors.

At stake for fund companies is a layer of regulations that industry representative say costs extra money -- not just to complete the required paper chase but also to stay one step ahead of slippery supply and demand equations for their investors.

It's a situation which has been heating up for years within the industry. But now, it appears to be bubbling over into the plates of investors. The regulatory issues that many ETF providers (or, more accurately, exchange-traded products sponsors) view as slowing innovation are threatening to directly impact at least one set of fund holders.

As a result, those involved in the latest regulatory snafu should be very interersted in the upcoming disclosure by the Obama administration of its master blueprint for reforming market mechanisms that it says ran amok during the mortgage meltdown.

More Fees, Please

Along with the millions of other viewers watching President Obama's televised press conference later today, so will a group of money managers in tiny Alameda, Calif.

That's home to fund executives of the United States Commodities Funds, which formerly used to be known as Victoria Bay Asset Management. While refusing to discuss their most recent concerns, they admit it's unlikely that President Obama or any of his cabinet have any idea of the regulatory plight the company is currently going through.

The firm is the subadviser to popular commodities ETFs such as the United States Oil Fund (NYSE Arca: USO). To be more precise, the sort of portfolios USCF put together using futures contracts and derivatives could be more accurately defined as ETPs. (An argument is currently raging on IU.com's blogs about just this topic.)

In any case, the issue that USCF is facing can be viewed as problematic for any fund that could be considered an ETP. The situation came to a head recently when the money manager and fund sponsor was forced to dole out another $75,000 to the Securities & Exchange Commission for a rather mundane piece of paperwork.

Actually, the group that officially got dinged was the trust running the United States Natural Gas Fund (NYSE Arca: UNG). It’s the third such filing fee, in fact, that the United States Natural Gas Fund Ltd. has been forced to pay in its rather short history. (You can read the filing here.)

Messy & Time Consuming

Since UNG is basically a commodities pool that trades daily on an exchange—commodities pools don’t always do that—the ETF’s trust has to apply to the SEC to issue a certain amount of new shares.

It’s a much different process than mutual funds governed by the Investment Company Act of 1940, including standard equity and fixed-income ETFs.

"This is an issue as a money manager that I'm concerned about," said Rob DeHollander, an adviser in Greenville, S.C. "What if this regulatory situation spreads to other commodity type of funds that deal in futures?"

As a commodities pool, UNG is actually regulated by four different groups. And that's where ETP managers are privately expressing hopes that Obama's new restructuring plan can streamline the paper chase that commodity ETPs are forced to endure.

As a result of current regulations, managers at USCF—which call headquarters a small island pocket community in the San Francisco Bay Area—must constantly try to figure out when demand will outstrip current supply restrictions.



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