Active Funds and Other Changes in the ETF Industry
by Tom Lydon and Charles Rotblut, CFA
Tom Lydon is editor and publisher of the ETF Trends website. I spoke with Tom recently about developments in the exchange-traded funduniverse.
Charles Rotblut (CR): It seems that, in part, the future growth in actively managed exchange-traded funds will be dependent on how the SEC applies the so-called ’40 act. Can you provide a brief explanation of what this act is and how it applies to ETFs?
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Tom Lydon (TL): The Investment Company Act of 1940 set standards by which investment companies should be regulated. The standards dictate how investment companies operate (promotion, reporting, requirements, pricing and allocation). The Dodd-Frank Act of 2010 overhauled the 1940 act to provide more consumer/investor protection and uniform standards for products.
However, the 1940 act does not specifically outline an ETF structure, which means that ETFs don’t actually fall under the U.S. Securities and Exchange Commission’s regulatory eye. As a result, a fund manager would have to register an ETF in a roundabout way.
Potential ETF providers would need to register as an investment company under the 1940 act, and then apply with the SEC to obtain “exemptive relief” from certain 1940 act provisions that cover open-end mutual funds. Once the exemptive relief is obtained, the fund provider is free to launch an ETF.
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Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.