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SEC to Lift Freeze on Active ETFs That Use Derivatives


The Securities and Exchange Commission is partly lifting its nearly three-year freeze on accepting filings for active ETFs that invest in derivatives, Reuters reported Thursday afternoon.

“The agency will continue to hold off on approving applications for leveraged and inverse ETFs,” according to the report, which cited comments by Norm Champ, director of the SEC’s investment management division, at a conference in New York.

“The SEC started a review in March 2010 of certain ETFs that used derivatives, particularly leveraged and inverse ETFs, were taking on too much risk,” report Jessica Toonkel and Suzanne Barlyn for Reuters.

“As part of the review, the SEC stopped approving exemptive requests by ETFs seeking to invest heavily in derivatives, until the review could be completed. Most ETFs that use derivatives are actively managed,” the article said.

PIMCO Total Return ETF (BOND) , an active fund managed by Bill Gross, has received a warm reception following its March 2012 launch. It holds nearly $4 billion in assets but is not allowed to invest in derivatives — complex securities that helped trigger the financial crisis — due to SEC rules for ETFs. [Why We Bought BOND]

“Although the Division continues its ongoing review of the use of derivatives by funds, Division staff will no longer defer consideration of exemptive requests under the Investment Company Act relating to actively-managed ETFs that make use of derivatives,” Champ said in speech.

However, the exemptive requests must address the SEC’s two main concerns about derivatives. The agency said the ETF’s board periodically will review and approve the ETF’s use of derivatives and how the ETF’s investment adviser assesses and manages risk with respect to the ETF’s use of derivatives. Also, the regulator wants the ETF’s disclosure of its use of derivatives in its offering documents and periodic reports to be consistent with relevant Commission and staff guidance.

“Because of concerns regarding leveraged ETFs, however, we continue not to support new exemptive relief for such ETFs,” Champ said in the speech.

Full disclosure: Tom Lydon’s clients own BOND.

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