The Sec is making it easier for exchange-traded funds (ETFs) to come to market. The Commission proposed in early March a rule that would allow ETFs to operate without first getting individual exemptive orders from the SEC.
ETFs have been required to secure an exemptive order from the Commission for about 15 years, giving the regulator ample time to determine “what requirements ETFs should have to live by, and so it made sense to [the SEC] at this point to propose” the rule, says Tom Conner, a partner with Sutherland Asbill & Brennan in Washington. “If the rule is adopted as proposed, it would eliminate one of the biggest hurdles in bringing an ETF to market.”
Filing an exemptive application is time consuming and expensive, Conner says, and has been “a significant consideration in the cost/benefit analysis” companies undertake when contemplating launching an ETF. “It used to take several years for the SEC to review [the exemptive application] and issue the exemptions,” he continues, but “the SEC has made a concerted effort in the last year to cut down the review time, and they’ve made very good progress on that.”
Conner believes the ETF industry will ask the SEC to “broaden availability of the rule” as the rule “would be limited to ETFs that have a completely transparent portfolio or that invest in a completely transparent index.” That means “innovative funds that might adopt more aggressive management techniques so that the portfolio is not transparent will continue to have to get their own exemptions.”
While Conner doesn’t believe the rule would prompt a flood of ETFs to enter the market, he does think it will lead more “mutual fund complexes that currently don’t have ETFs to take another look at whether it would make sense for them to launch an ETF.”