U.S. SEC mulls streamlining launch of exchange-traded funds

NEW YORK Thu Jun 6, 2013 5:23pm EDT

A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June 28, 2012. REUTERS/Mike Stone

A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June 28, 2012.

Credit: Reuters/Mike Stone

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission will consider a proposal this year that would sweep away regulatory barriers to launching certain types of exchange-traded funds, a senior official said.

Norm Champ, director of the SEC's Division of Investment Management, told the Reuters Global Wealth Management Summit that a move to simplify procedures for approving "plain vanilla" ETFs would help the industry and the agency use its resources wisely.

"I'm now spending in my division the time of lots of people to review these plain-vanilla applications," said Champ, who tallied the equivalent of 10 full-time employees reviewing applications for new ETFs.

The SEC has been giving new ETFs what it terms "exemptive relief" from requirements of the Investment Act of 1940 on a case by case basis. But by defining in advance the kinds of funds that would get that relief, the commission could save itself time, he said.

The big issue for ETF companies would be how exotic a fund could be and still get automatic relief from the SEC. Champ declined to go into detail about what those guidelines might look like, but he also declined to rule out the possibility that they might allow some actively managed ETFs to qualify along with the straightforward index followers.

The $1.5 trillion ETF industry has been growing at breakneck pace, tripling its assets since 2008, according to data from Lipper, a research unit of Thomson Reuters Corp. The move to streamline the application process could lead to lower costs for shareholders.

Reuters first reported in April that the SEC was considering reviving a 2008 proposal under then-Chairman Christopher Cox that would have allowed funds to bypass the lengthy application process if they disclosed the identities and weightings of their funds' underlying investments.

"The industry would be pleased to see this kind of action, but the question is what constitutes a plain-vanilla ETF," said Mike Rawson, ETF analyst with Morningstar.

Rawson said that price competition in less-risky areas such as S&P 500-tracking funds has led new competitors to focus on other asset classes and risk profiles. "No one has been able to launch a plain-vanilla ETF that's gathered as much assets as the top three providers."

Champ did not say if any conditions would be imposed on the ETF providers who would be granted exemptions. ETFs, which are marketed by companies like BlackRock (BLK.N), Vanguard and State Street Global Advisors (STT.N), are financial instruments that can be traded on public exchanges and, like mutual funds, derive their value from a basket of stocks and bonds.

They have become increasingly complex, with new proposals for ETFs that use derivatives and active trading regularly landing on SEC desks.

The proposal is "next up" on Champ's list of priorities for the Investment Management Division. His team is also focused on streamlining how the SEC collects data from the mutual fund industry so that it can better monitor for violations. The SEC currently relies on data it collects from a hodgepodge of different forms to monitor funds and spot potential violations, Champ said. Many of those forms are antiquated, including one that is powered by decades-old computer technology, Champ said.

Simplifying disclosures for investors who buy variable annuities is another priority, Champ said. It is not uncommon for the disclosures to be as voluminous as a telephone book, Champ said.

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(With additional reporting by Suzanne Barlyn and Ashley Lau; editing by Linda Stern and Phil Berlowitz)

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