* Agency will still not review applications for leveraged
* ETFs can now use derivatives again
By Jessica Toonkel and Suzanne Barlyn
NEW YORK, Dec 6 The U.S. Securities and Exchange
Commission is partially lifting an almost three-year-old
moratorium on applications for actively managed, exchange-traded
funds, creating an opportunity for fund managers to use
derivatives when they launch them.
Exchange-traded funds, or ETFs, are similar to mutual funds,
but trade on exchanges on a real-time basis.
Only 37 of 1,267 ETFs in the United States are actively
managed, according to Lipper, a subsidiary of Thomson Reuters
Corp.. They represent 0.93 percent of the $1.2 trillion
in assets in U.S. ETFs.
In March 2010, when the SEC began reviewing the risks posed
by how mutual funds and ETFs used derivatives, the commission
placed a moratorium on all applications from firms looking to
open ETFs that used such instruments, including credit default
On Thursday, the director of the SEC's investment management
division, Norm Champ, told a conference hosted by The American
Law Institute Continuing Legal Education Group in New York that
the moratorium, for the most part, would be lifted.
Now, after almost three years the agency is lifting the
moratorium for the most part, Norm Champ, director of the
investment management division, said in New York on Thursday at
a conference hosted by The American Law Institute Continuing
Legal Education Group.
With the moratorium's end, mutual funds will have an easier
time getting into the actively managed ETF space and both will
have more flexibility when it comes to using derivatives,
"This will mean more choice and more options for the end
investor," said Tom Lydon, president of Global Trend
Investments, a registered investment adviser and editor of
MORE FLEXIBILITY FOR FUNDS
Champ, in his speech, clarified that the agency will
consider applications for actively managed ETFs that use
derivatives under two conditions: the funds' boards periodically
review and approve their use; and the funds disclose the use of
derivatives periodically consistent with SEC guidance.
The agency, however, is still not considering applications
for leveraged ETFs, Champ said.
Over the years, with no end to the SEC's moratorium in
sight, fund companies and ETF providers began applying to start
actively managed ETFs without using derivatives.
But being able to use derivatives offers managers more
flexibility in gaining returns, said Adam Patti, chief executive
of Rye Brook, New York-based IndexIQ, an ETF provider with $940
million in its passively-managed ETFs.
IndexIQ did receive an exemption to launch active ETFs
without using derivatives earlier this year, but now may apply
to launch active ETFs that use derivatives, Patti said.
"This is very big news and this is definitely something we
would want to have," he said.
Pimco, which as of June had $1.82 trillion in assets under
management, launched the Pimco Total Return ETF in
January. It was seen as a cheaper, more transparent way for
mainstream investors to access bond guru Bill Gross.
The ETF now has $3.8 billion in assets and is essentially, a
clone of Gross' $252 billion Total Return mutual fund,
except it cannot use derivatives.
But the moratorium's partial end may change that.
"This means that firms like Pimco can now better implement
their strategies," said Dave Nadig, director of research at
IndexUniverse LLC, a San Francisco-based ETF researcher. "BOND,
for instance, doesn't hold the credit default swaps that are a
staple of its mutual fund brother.
"With this news, Pimco could file for extended relief to let
them more closely mirror the portfolio," Nadig said.
A Pimco spokesman did not return requests for comments.
While the SEC's decision to lift the moratorium on active
ETF applications may make it easier for mutual fund companies to
enter the sector, many experts are skeptical if they will do so.
For one thing, with active ETFS portfolio managers would
have to agree to have all of their positions made available to
the public on a daily basis.
"Most traditional active ETF managers are terrified of that
idea," Nadig said.