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Foley & Lardner advises first actively-managed exchange-traded fund


Chicago-based law firm Foley & Lardner has acted as lead regulatory counsel to Bear Stearns Active ETF Trust in bringing the first actively-managed exchanged-traded fund to market.

Chicago-based law firm Foley & Lardner has acted as lead regulatory counsel to Bear Stearns Active ETF Trust in bringing the first actively-managed exchanged-traded fund to market. Shares of the Bear Stearns Current Yield Fund will begin trading on the American Stock Exchange on March 18.

George Simon and Patrick Daugherty, the leaders of Foley’s ETF team, led a multi-disciplinary team in guiding Bear Stearns toward approval for the active ETF from the Securities and Exchange Commission. Daugherty took charge of disclosure issues, while Simon was responsible for designing the fundamental structure of the fund and dealing with SEC division of market regulation and Amex issues.

Says Simon: ‘ETF sponsors have been trying to bring actively-managed ETFs to market for over a decade, but have been prohibited by SEC concerns. Successfully bringing the first actively-managed ETF to market is a watershed event for the industry. The launch of this innovative product will certainly open the door to other actively-managed ETFs in the near term.’

Daugherty, chief strategy partner in Foley’s business law department, adds: ‘Working with Bear Stearns has been an extremely demanding and rewarding experience for us. This marks a significant milestone in the evolution of ETFs.’

ETFs have traditionally been restricted to passively mirroring an index, but actively-managed ETFs have a fund manager who has full discretion to choose investments. They offer investors advantages such as tax efficiency and greater flexibility, but have been held up until now due to SEC demands that active ETFs provide the same transparency as stocks.

‘There is a clear push-pull in efforts to achieve a balance between the SEC’s desire for full disclosure and accurate pricing information and the portfolio managers’ desire to disclose as little as possible for fear of front-running and free-riding,’ Simon says. ‘All the products being processed now are fully transparent, but we have no doubt that the SEC will move to less transparent funds next.’

The Bear Stearns Current Yield Fund will maintain transparency by reporting the entire underlying portfolio daily via the web site Since the fund is composed of short-term fixed-income instruments, as opposed to equities, there is less threat of front runners copying the fund.

The fund bears some resemblance to a money-market fund, as it seeks capital preservation and capital appreciation by investing in high-grade debt securities, but it does not seek a stable net asset value or observe other restrictions imposed on money market funds.

Foley & Lardner counsels the entire range of ETF industry participants, from index providers and fund sponsors to stock exchanges, specialists, investment advisors and sub-advisors, banks and institutional investors. The firm was instrumental in bringing StreetTracks Gold, the first commodity-based ETF, to market and serves as lead counsel to the CurrencyShares products, the first ETFs to track foreign currencies.

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