ETF industry aflutter over fate of Huntington request

Thu Jun 21, 2012 5:49pm EDT

* Huntington executive says SEC did not deny outright

* Some hope agency will still consider conversions

By Jessica Toonkel

NEW YORK, June 21 (Reuters) - Mutual fund and exchange-traded fund providers were aflutter on Wednesday after hearing that the U.S. Securities and Exchange Commission had not approved a request by Huntington Asset Advisors to fold an existing mutual fund into a new actively managed ETF.

At one firm that offers both mutual funds and ETFs, executives were e-mailing back and forth about the issue within minutes of learning that Huntington would instead launch an active ETF clone alongside its mutual fund, an executive at the firm said.

"We have a lot of money in proprietary mutual funds and if they go the way of the dodo bird, we have to be prepared from a legal perspective," said the executive, who declined to be named because he is not permitted to speak to the press.

Noah Hamman, chief executive and president of AdvisorShares, which distributes active ETFs, said he hopes the SEC might consider the issue again. AdvisorShares distributes 14 active ETFs that together have $575 million in assets. Hamman said allowing funds to fold into a new actively managed ETF could be a boon for less-connected fund managers.

"If you have a five star manager that really struggled with getting access on the wirehouses or doesn't want to pay the 25 basis points or revenue share, this is a way they could bring over their track record and sell their fund as an ETF," he said. "The SEC should allow it."

After telling Reuters on Wednesday that the SEC would not allow it to convert the mutual fund to an active ETF, Randy Bateman, president and chief investment officer of Huntington Advisors, the asset management arm of Huntington Bancshares Inc , said on Thursday that the agency did not issue an outright denial.

Rather, after two years of the SEC repeatedly asking new questions about its request, Batemen said the company believed it was never going to get approval for its application and decided to cut its losses and instead launch an ETF clone alongside its mutual fund.

"We did not want to hold up our entire entry into the ETF business, not to mention the further bleed of attorney fees," said Bateman.

An SEC spokesman did not return calls for comment.

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.

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 on July 25.

Bateman said Huntington will make sure the new ETF is not exactly like the mutual fund so it does not cannibalize assets. 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.

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 sector 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 ETF.

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