The SEC settled claims against a registered investment adviser (the “Adviser”), its affiliated broker-dealer (the “Broker-Dealer”), and the founder, owner, and president of each (the “CEO”) that related to (1) investments in Class A shares of underlying funds made by funds managed by the Adviser (the “Funds”) and (2) commissions paid by the Funds to the Broker-Dealer for trades in exchange-traded funds (“ETFs”). Without admitting or denying its findings, the Respondents agreed to the settlement order (the “Order”), available here, which this post summarizes.
Posts Tagged ‘Exchange-traded funds’
Nearly three years after the U.S. Securities and Exchange Commission (“SEC”) effectively froze the creation of actively managed and leveraged exchange traded funds (“ETFs”) that utilize options, futures, swaps, and other derivatives as part of their investment strategies, the SEC has lifted the moratorium on the use of derivatives by actively managed funds while continuing to restrict the use of derivatives by leveraged ETFs. The SEC’s decision follows a Concept Release issued last August soliciting comments on the issue from the public. ETFs, which are typically registered as open-ended investment companies under the Investment Company Act of 1940 (the “’40 Act”), usually require exemptive relief from the SEC because certain common features of ETFs do not comport with the strict provisions of the ’40 Act.
On December 6, 2012, in a speech to the American Law Institute’s Conference on Investment Adviser Regulation in New York City, Norm Champ, Director of the Division of Investment Management, announced the SEC has reversed course and “will no longer defer consideration of exemptive requests under the Investment Company Act relating to actively managed ETFs that make use of derivatives.” In his speech, Director Champ made clear the SEC’s decision was subject to two important conditions, each designed to address the concerns by the SEC back in March 2010 when it first imposed the moratorium on derivatives. To that end, issuers seeking to create an actively managed ETF that employs derivatives will be required to represent: “(i) that 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; and (ii) that the ETF’s disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission and staff guidance.”
FINRA proposes to amend Rule 5110, the Corporate Financing Rule, to permit a broader range of deferred compensation arrangements between member firms and issuers regarding future public offerings, provided the arrangements meet two significant new requirements.  Under the proposal, engagement letters for underwriting and financial advisory services will be permitted to include termination fees and rights of first refusal, but must specify that any future underwriting fees be reasonable or customary and must permit the issuer to terminate these arrangements for cause. As is currently the case, the arrangements also must be limited to two or three years in duration as described below. While the proposal will provide member firms more flexibility to negotiate deferred compensation arrangements with their issuer clients, they should consider the potential impact of the proposed new requirements on their engagement letter practices. Separately, FINRA also proposes to amend Rule 5110 to exempt a broader range of exchange-traded fund (“ETF”) offerings from the filing requirement of the Rule. FINRA has asked for comments on the proposals by July 23, 2012.
The Investor Responsibility Research Center Institute and PROXY Governance Inc. recently released an in-depth analysis of the proxy voting policies and recent voting records of seven of the largest exchange-traded fund (ETF) sponsors, which account for some 94% of the ETF market. Entitled “Proxy Voting by Exchange-Traded Funds: An Analysis of ETF Voting Policies, Practices and Patterns,” the study was commissioned by the non-profit IRRC Institute and conducted by PROXY Governance.
The findings indicate a considerable variation in the voting patterns and philosophies of these funds. The key research findings are as follows:
• There appear to be significant differences in the level of detail of proxy voting guidelines utilized by ETF sponsors. The ETF sponsors in the study that relied on guidelines provided by proxy advisory firms appear to have the most detailed and comprehensive, and prescriptive, guidelines. At the other end of the spectrum, Rydex has very summary guidelines that stipulate voting with management on virtually all issues.
• There is significant variation in the voting philosophies and patterns of the largest ETF sponsors, with some funds much more likely to vote against management on both shareholder and management-sponsored proposals than other funds
• The votes by the specific funds at selected 2008 annual meetings are generally consistent with the written voting policies of those funds. Case-by-case voting policies by many funds on most issues explain much of this consistency. In a few cases, however, specific votes were cast that appear to be potentially contrary to the fund’s written voting guidelines.
• Funds that rely heavily on a proxy advisory firm for voting guidelines or to make their vote decisions tend to vote against management proposals, and in favor of shareholder proposals, more frequently than those that rely on their own guidelines.
The study covers the following seven ETF sponsors – Barclays Global Investors (iShares), State Street Global Advisors (SPDRs), Vanguard Group (Vanguard ETFs), Invesco Ltd. (PowerShares), ProFunds (ProShares), Rydex Investments (RydexShares) and WisdomTree Trust (WisdomTree ETFs). (NB: Barclay’s Plc recently announced that it would sell its Barclay’s Global Investors asset management division, the single largest ETF manager, to BlackRock, Inc.)