December 7, 2012 6:45 pm

US removes obstacles to active ETFs

US regulators have removed an important obstacle to the development of active exchange traded funds following an announcement that they will now consider applications to launch active ETFs that use derivatives.

The Securities and Exchange Commission placed a moratorium on the use of derivatives by new mutual funds, exchange traded funds and other investment companies in March 2010.

But in a speech on Thursday, Norm Champ, the director of the SEC’s division of investment management, said that while the regulator was continuing with its review of the use of derivatives by funds, it would allow managers to apply for permission to launch active ETFs that use derivatives provided they met with certain considerations.

However, Mr Champ also made it clear that the SEC was not changing its position regarding leveraged and inverse ETFs.

The SEC has issued several warnings about leveraged and inverse ETFs saying as recently as August that these products were not suitable for long-term investors.

However, those managers that have already secured regulatory clearance, known as “exemptive relief” will be able to continue to launch new leveraged and inverse instruments. Managers that have not already secured exemptive relief will not be permitted to launch such vehicles.

Richard Morris, a partner at Morgan, Lewis & Bockius, a global law practice, said that the SEC’s comments were significant and could potentially open a new chapter for the development of the ETF industry.

“Allowing the use of derivatives in active ETFs is likely to prompt further product development and to encourage new players to enter the ETF industry”.

Mr Morris said that much would depend on the implementation of any new guidelines and the scope of derivatives usage that the regulator would permit.

“If the SEC does allow ETF managers to use the full array of derivatives that are available to mutual fund managers, then that would allow active ETFs to compete head-to-head with active mutual funds.”

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