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US regulatory change boosts ETF creation


Last month saw the SEC pass the long-awaited ETF rule, the 6c-11 rule. Christopher Carlson, counsel at Seward & Kissel LLP, based in the Investment Management Group in Washington, DC explains that the new rule will allow firms to launch ETFs more quickly.

However, he also warns that, over his lengthy career advising ETFs and registered funds, he has observed that firms are now – and need to be – more focused on putting out ETFs that can be successfully distributed.

“About a year ago, the SEC staff put out a risk alert focusing on sponsors that were launching several ETFs, some of which were liquidated shortly afterward. I think it’s made people take a closer look at what ETF ideas are viable, and more selective in what they launch,” he says.
Carlson joined Seward & Kissel in 2019, having worked in the past for Dechert, in the registered funds space and on numerous ETF launches since 2009.
He then went in-house and enjoyed that experience but preferred being in a law firm. “Seward & Kissel provided a good opportunity to be involved in a firm with a substantial presence in financial services that is committed to growing their solid registered fund practice.”
He has joined the firm at an interesting moment for ETFs, with regulatory rule changes in the offing. “My focus has been limited by what the clients bring to me,” he says. “From my experience, clients in the ETF space were focused on passive ETFs but most of the broad-based indices were already taken, so many were scrambling to get a foothold in niche spaces.”
“I have previously worked with clients on creating ETFs for narrow slices of the market and we would do all the preparatory work to launch a number of funds, but then for every one launched, there would be more that didn’t.”
He now sees a more pragmatic approach from ETF providers who are focusing on funds they expect to do well.
“The next stage is the arrival of non-transparent actively-managed ETFs, which only disclose their entire portfolios on a quarterly basis and gives some protection from others’ understanding what trading strategies they are using,” Carlson says.
“Judging by the number of industry discussion on this subject, there is a huge amount of interest in it and firms new to the ETF space are thinking about this and doing their due diligence on this sort of product structure.”
Only one sponsor so far, Precidian, is known to be working on launching a non-transparent actively-managed ETF and Carlson says he believes that they are still working out some of their pre-launch items. He believes that four other ETF sponsors are close to getting their products ready, so the next three to four months might see more non-transparent models to choose from.
“This could result in more of a shift from passive ETFs to active ETFs which really are very small in terms of total ETF assets,” he says. “We are keeping a close eye on this trend because there is a lot of interest and many questions around the subject. There are several different models and each is subtly different in how it would disclose information to the marketplace as to what is in each portfolio.”
Other trends Carlson has been involved in are thematic ETFs. “These ETFs aren’t really trying to replicate a portion or slice of the market but are taking themes such as companies involved in the upgrade of cellular networks to 5G and are not really based on any market fundamentals or tracking a bit of an index – it’s more of a macro or industry trend.”
Assets will continue to flow into ETFs, he believes. “ETF clients are much more active in terms of launching new products,” he says. “If you look at the industry data from Investment Company Institute, most of the growth within the part of the funds world I practice in is either in liquid alternative assets or assets in ETFs, so the market is bifurcated and I see no reason why that won’t continue.”

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