SEC to Resume Exemptive Orders for ETFs Using Derivatives (with Lofchie Comment)

The SEC Division of Investment Management announced that it will no longer defer consideration of exemptive requests under the Investment Company Actrelating to actively-managed ETFs that make use of derivatives, provided that the ETFs include representations to address some of the concerns expressed in the March 2010 press release. These representations are as follows:

(i) that the ETF's board periodically will review and approve the ETF's use of derivatives and how the ETF's investment adviser assesses and manages risk with respect to the ETF's use of derivatives; and (ii) that the ETF's disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission and staff guidance.

The Staff further stated that it would not recommend enforcement under Investment Company Act Sections 2(a)(32) (redeemable security), 5(a)(1) (subclassification of management companies), 17(a) (transactions of certain affiliated persons and underwriters), 22(d) and 22(e) (distribution, redemption, and repurchase of securities; and regulations by securities associations), or Rule 22c-1 thereunder, given certain conditions provided in the letter. This position is provided for enforcement purposes only, and applies to those actively-managed ETFs listed on Attachment A of the letter.

Lofchie Comment: This impending change in practice was previously announced by Norm Champ, the Director of Investment Management. (SEC Director Champ Remarks on Investment Adviser Regulation (Important Speech) (with Lofchie Comment)

Click here to view letter in full (links externally to SEC website).