PHOENIX Dec 7 Sponsors of U.S. exchange-traded
funds should not expect regulatory approval for more complex,
and higher-fee, products anytime soon, attorneys specializing
in funds said.
The Securities and Exchange Commission, already slowed by
numerous rule-making proceedings from the Dodd-Frank Act, is
backing away from allowing more innovation in ETFs as
complaints about the funds' impact on markets mount, according
to Michael Mundt, a partner at Stradley Ronon Stevens & Young.
When the SEC disclosed a wide-ranging probe of the ETF
market at a congressional hearing in October, Mundt, a former
SEC assistant director, said he was surprised at the "laundry
list of things" the agency planned to study.
"There almost seems to be a bit of a back to basics
mentality," Mundt said, speaking on Tuesday at the "Super Bowl
of Indexing" conference here.
That is bad news for ETF sponsors like BlackRock
and Vanguard Group, which have asked the SEC for permission to
create more complex funds that would not disclose all of their
holdings on a daily basis.
The fund sponsors have acknowledged that it could take
years for the SEC to approve their filings.
"I'm pessimistic about what the future holds in terms of
expansion of the market for innovative products," Stuart
Strauss, a partner at Dechert LLP, said at the conference.
Strauss said there is a growing perception among lawyers
outside the SEC that the agency "is being extraordinarily
cautious in expanding the ETF market into new products."
The SEC in March 2010 suspended approval of new leveraged
or actively managed ETFs that rely on derivatives and has not
acted on filings seeking to delay or abandon daily disclosure
of holdings. Most of the proposed funds use more complicated
investment strategies, like those followed by hedge funds, than
do more typical index-tracking ETFs.
Some of the proposed funds are also likely to carry higher
fees than typical ETFs and provide new areas for growth in the
market, which has been inundated with copy-cats of plain
vanilla index offerings.
U.S. regulators are moving slowly because of complaints
that some ETFs may be increasing market volatility or creating
new, unforeseen risks for investors. ETF sponsors have argued
the funds are being unfairly blamed for tough market
The go-slow approach should not affect applications by ETF
sponsors to run funds based on in-house indexes, Strauss said.
Almost all ETFs track indexes provided by third parties like
MSCI , the Standard & Poor's unit of McGraw Hill and Russell Investments.
But BlackRock, the largest ETF sponsor, filed in August for
permission to run funds based on internally created indexes.
"It's already permitted right now for other firms," Strauss
Representatives of the major indexing firms expressed
little fear that fund firms would eat into their lucrative ETF
"This is something we've seen for the last five, 10, 15
years," David Blitzer, chairman of the index committee at S&P,
said at the conference. "It's just another form of competition
and competition is good for everyone."
New index providers may find the field more difficult to
break into than they expect, he added.
"They also may miss some of the checks and balances and
other things we bring to it," Blitzer said. "We hope and expect
to continue to be a major player."