SEC eyes lifting exemptive order requirement on ETFs

A stalled proposal hammered out last year to permit exchange traded funds to operate without having to obtain individual exemptive orders may finally see the light of day sometime within the next few months. “It's clearly something we would like to move forward on,” Andrew J. "Buddy" Donohue, director of the SEC's division of investment management, said today in Phoenix at the Investment Company Institute's Mutual Fund and Investment Management conference. In disusing the proposed rule, however, he let slip concerns he had with the ETF structure. Specifically, Mr. Donohue said he was concerned authorized participants – those responsible for buying or selling shares of an ETF directly from the fund's manager to ensure its intraday market price approximates to the net asset value of the underlying assets – could benefit from inside knowledge they possess at the expense of retail investors. That wasn't a concern as long as long as ETFs traded in line with their NAV, but it is a potential problem when an ETF deviates from its NAV, Mr. Donohue said. ETFs generally trade in line with their NAVs, but a number of funds traded at persistent premiums or discounts during the recent market downturn. Another proposed rule that got put on hold – a rule pertaining to Rule 12(b)-1 fees – is also likely to become reality in the not-too-distant future, Mr. Donohue said. Reforming the rule had been a front-burner issue because critics contended that the primary use of the mutual fund fees has shifted from paying for fund marketing to substituting for a sales load. Reform of the rule, however, was put on hold while the commission dealt with issues directly related to the recent market downturn. But Mary Schapiro, chairman of the SEC, said late last year that revision of Rule 12(b)-1 would once again become a priority.