SEC rejects Huntington's request to convert fund to ETF

NEW YORK Wed Jun 20, 2012 5:31pm EDT

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NEW YORK (Reuters) - Mutual fund companies and financial advisers that had hopes of converting their funds into actively managed exchange-traded funds have had their hopes dashed.

After two years of review, the U.S. Securities and Exchange Commission has denied a request by Huntington Asset Advisors, the asset management arm of Huntington Bancshares Inc, to fold an existing mutual fund into a new actively managed ETF.

An agency approval would have made it much easier for any fund company to get such approval. That in turn would mean easier entry into the actively managed ETF space for fund companies, since they could have launched active ETFs that automatically had assets in them, experts said. In that case, the firms also would have been able to use the mutual fund's historical performance when marketing the ETFs.

"It would have been huge for ETFs," said Dave Nadig, director of research at IndexUniverse, which tracks ETFs. "Can you imagine being able to take a mutual fund stalwart like the American Funds Growth Fund of America or Fidelity's Contrafund and turn it into an ETF?" he said.

In June 2010, Huntington filed to launch two actively managed ETFs: the Huntington Ecological Strategy Fund and the Huntington Rotating Strategy Fund.

The latter is an ETF clone of an existing Huntington mutual fund that had $41 million in assets as of March 31. Huntington planned to close the mutual fund and allow its investors to move the money, tax-free, to the new ETF.

Randy Bateman, president and chief investment officer of Huntington Asset Advisors, said the firm was disappointed with the SEC's decision, but has decided to launch the active ETF on its own, alongside the mutual fund.

"We had wanted to be able to promote the track record of the fund with the new ETF and allow investors to do a tax-free exchange, but sometimes you have to just capitulate and move forward," he said.

Bateman did not know why the SEC denied the request. An SEC spokesman could not immediately provide comment.

Huntington launched its first active ETF, the Huntington Ecological Strategy ETF, which targets ecologically focused companies and products, on Tuesday. Its Sector Rotations ETF will come to market July 25.

Bateman said Huntington will make sure the new ETF is not exactly like the mutual fund so that it does not cannibalize assets, Bateman said. He declined to elaborate.

Active ETFs are still a very small portion of the $1 trillion-plus U.S. ETF market, in large part because it has been difficult for firms to get SEC approval to launch products, expert said. There are only 49 actively managed ETFs, with a total of $6.8 billion in assets, according to Morningstar.

One actively managed ETF that has gained traction with investors - and quickly - is Pacific Investment Management Co.'s Total Return Exchange Traded Fund, a clone of Pimco's $261 billion Total Return Fund. Pimco launched the ETF in March, and the fund already has close to $1.5 billion in assets - a 22 percent share of the active ETF market.

Pimco, which kept its mutual fund open, garnered attention largely because of its manager, Bill Gross.

SEC approval of Huntington's plan - and the instant asset infusion for the active ETF that would followed - would have made it easier for firms to join Pimco with large, active ETFs sooner, Nadig said.

"This would have unleashed a lot of potentially new and innovative ETFs," he said.

(Reporting By Jessica Toonkel; Editing by Jennifer Merritt, Gary Hill)

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