SEC rule change would eliminate exemptive orders for ETFs

Investors will be the ultimate winners if a Securities and Ex-change Commission proposal to permit exchange traded funds to operate without having to obtain individual exemptive orders becomes a reality. "I think this is good," said Marvin Appel, chief executive of Appel Asset Management Corp., a Great Neck, N.Y., firm that manages $50 million in assets. "I'm sure this is going to work out for investors." It is seen as positive because streamlining the process by which ETFs are approved should result in more ETFs coming to market, he said. That idea was echoed by Andrew J. "Buddy" Donohue, director of the SEC's division of investment management, in an SEC statement last Tuesday announcing the proposed rules. "The proposed rules would in-crease investor choice by eliminating a barrier to entry for new participants in this fast-growing market, while preserving investor protections," he wrote. "Permitting most ETFs to come directly to market without the cost and delay of obtaining an exemptive order would also allow staff to focus on more novel and difficult requests." The commission voted to propose a new rule that would "codify most of the exemptions previously granted by the commission to index-based ETFs and, pursuant to several recently issued exemptive orders, to fully transparent actively managed ETFs," according to the SEC statement. The SEC also voted to propose a new rule to allow investment companies such as mutual funds to make larger investments in ETFs than is currently permitted.

SURPRISING DEVELOPMENT

Most everyone in the ETF market anticipated the proposed rules, but the rule that would allow actively managed ETFs to come to market without first obtaining exemptive relief was something of a surprise, said Tom Conner, a partner in the financial services practice at the Washington-based law firm Sutherland Asbill & Brennan LLP. He attended Tuesday's SEC meeting where the proposed rules were announced. "I think I would not have been surprised if they had said: 'We need to have more experience in crafting those exceptions before they are included in the rule,'" Mr. Conner said. It is definitely a victory for ETF providers, but he said it is also bound to be the source of much debate during the rule's 60-day comment period. "I do think one of the areas of likely comment from the industry may be to suggest to the SEC as to whether it should broaden the rule to include active ETFs that are not transparent," Mr. Conner said. Most industry participants, however, will favor the proposed rules, making it much more likely that the rules will become reality before the end of the year, he said. E-mail David Hoffman at dhoffman@investmentnews.com.