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SEC Division of Investment Management Lifts Actively-Managed ETF Derivatives Use Moratorium and Announces Two Rulemaking Initiatives

In a speech on December 6 before the ALI CLE 2012 Conference on Investment Adviser Regulation: Legal Compliance Forum on Institutional Advisory Services, Norm Champ, the new Director of the Division of Investment Management of the Securities and Exchange Commission, stated, “the Division staff will no longer defer consideration of exemptive requests . . . relating to actively-managed ETFs that make use of derivatives.” Such exemptive requests must now contain two specific representations: (1) that the ETF board periodically will review and approve the ETF’s use of derivatives and how the ETF’s adviser assesses and manages risk regarding the ETF’s use of derivatives; and (2) that the ETF’s disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant SEC guidance.

In March 2010, the Division imposed a moratorium on actively managed ETF exemptive applications where the ETF would use derivatives in its portfolio. The Division later sought public comment on the use of derivatives by all investment companies, including ETFs, under a Concept Release it issued on August 31, 2011, to which it received almost 50 comment letters. Index-based ETFs have been able to seek exemptive relief where their use of derivatives was confined to up to 20% of their portfolio that was not invested directly in their referenced index’s components. Mr. Champ also indicated that the moratorium remained in place with respect to new applications for leveraged ETFs and that the Division staff was continuing to review investment company use of derivatives.

Mr. Champ also discussed two rule initiatives that will affect advisers and investment companies. First, the Division is working on rules under the Investment Advisers Act of 19409 for private fund advisers relating to books and records rules and advertising in light of the JOBS Act, which requires the SEC to promulgate rules allowing general solicitation and advertising for certain Regulation D, Rule 506 private placements. Second, the Division will be issuing additional guidance on investment company valuation of securities.

Mr. Champ’s speech is available here.

©2014 Katten Muchin Rosenman LLP

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About this Author

Peter J. Shea, Financial Insituations, Katten Muchin Law firm
Partner

Peter J. Shea is a partner in Katten’s Financial Services practice. His clients range from NYSE-listed exchange traded funds to small private businesses as well as registered investment companies, hedge funds, investment advisors, broker-dealers and other financial institutions.

212-940-6447
Kathleen H. Moriarty, financial institutions attorney, katten muchin law firm
Partner

Kathleen H. Moriarty has extensive experience representing investment companies with the creation, structuring and development of new exchange-traded products. Kathleen was actively involved in the development of Standard & Poor's Depository Receipts (SPDRs) and has since advised on the creation of many more exchange-traded funds (ETFs), including iShares, Vanguard Exchange-Traded Funds (VIPERS), ProShares, WisdomTree and IndexIQ.

212-940-6304