Tuesday, December 11, 2012

SEC Gives the Green Light to Active ETFs Using Derivatives

In an address before the ALI Conference on Investment Adviser Regulation in New York City on December 6, 2012, Norm Champ, the new Director of the SEC's Division of Investment, announced that the “Division staff will no longer defer consideration of exemptive requests under the Investment Company Act relating to actively managed ETFs that make use of derivatives.” The SEC instituted a moratorium on granting permission to ETFs to use derivatives in 2010 pending a study the agency was conducting regarding the use of derivatives by regulated investment companies. The SEC's decision affected new and pending exemptive requests from certain actively-managed and leveraged ETFs that particularly rely on swaps and other derivative instruments to achieve their investment objectives.

According to Mr. Champ, the SEC will now entertain requestes for exemptive relief from ETFs wishing to use derivatives provided they include two specific representations to address some of the concerns that led to the Division’s decision to defer consideration of these types of applications. These representations are: (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. Because of the Commissions concerns regarding leveraged ETFs, however, Mr. Champ said that the SEC's Staff will continue the moratorium on new exemptive relief for such ETFs.