Two ETF industry trends stand out as key themes for the remainder of the year — changes in the ETF approval process and the inclination toward active and smart beta methodologies.
On June 28, the SEC voted to propose a new rule allowing many ETFs registered as open-end investment companies to come to market without first getting exemptive relief, thus avoiding the current process required to establish a new ETF structure.
What this means in terms of comments from the SEC staff remains to be seen, but the changes may be significant from a timing standpoint. The comment period currently is set to end on Oct. 1.
There has been considerable speculation on how the SEC’s proposal to expedite the ETF approval process will impact white-label ETF issuers and the value proposition they provide. The best parallel should be what is currently involved in establishing a new series trust for open-end mutual funds versus adding a new fund to an existing series trust.
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When initiating a new series trust, there is a great deal more involved in the start-up phase. An organizational board meeting must be held to initiate all the resolutions establishing the trust, its bylaws, procedures, codes of ethics, appointment of all the service providers and authorization to perform this function.
These resolutions must then be drafted and approved by a new board of trustees. We had an organizational board meeting for a new investment company (mutual fund) trust recently and the board book was over 1,200 pages.
Once a new series trust is organized and filed, there is an indeterminate period prior to when a new registrant can expect to receive comments from the SEC staff.
With a new fund being added to a series trust, the board meeting required to add the fund also involves a significant amount of material. There is a process for approving a new investment advisor to the fund called the 15(c) disclosure and approval, which is extensive.
The process is still streamlined compared to a new trust, however, all these same approvals and resolutions must be approved for filing a new fund in a new trust.
The ETF exemptive order process takes the new series trust process and adds yet another layer of complexity to the filings. Currently, and over the past 10 years or so for ETF exemptive filings, the entire process has taken well over a year. In many cases, the exemptive order process has extended for 3-5 years.