Believe it or not, ETF launches would be coming even faster if the issuers had their way. What is slowing the flood is often an complex and winding approval process through the SEC. Exchange-traded funds require an exemption from the '40 Act, something SEC staffers do not grant as a routine, even if it seems that ETFs are now routine.
In the spirit of encouraging competition, the SEC staff has traditionally let funds that are doppelgangers of those already approved go through relatively quickly due to precedent.
Yet, those funds with more novel structures were often left out in the cold sometimes for as many as two years.
In one exceptional case, according to sources familiar with the situation, the SEC took between five and six years to approve one ETF from ProShares.
The wrath of the SEC could potentially delay ETF approval indefinitely, so executives who spoke to MFWire
about this story all wished to remain anonymous.
Some fund execs see a touch of favoritism in the approval process. An executive at a Vanguard rival told The MFWire
that all the bond ETF issuers filed at about the same time, but Vanguard, which was not first to file, was approved first by the SEC.
"I don't think the SEC should be determining winners and losers in the marketplace," he added.
To untangle the tangled approval process, one insider says that the big issuers started recruiting lawyers with connections inside the SEC, so that they would have a leg-up or at least some insight as to whose desk their application was stranded on.
That effort sparked a recruiting war among fund firm lawyers, benefiting lawyers who went to law school with members of the SEC more than anyone else.
This more old fashioned Washington method of cozying up to commissioners to win favor may not be as effective as it sounds, though. ETF insiders compare it to knowing a cop to get out of a speeding ticket. It sounds good in theory but barely ever works in reality.
Members of ETF shops have gone so far as to seek the help of the ICI, pushing the trade group to lobby Congress to put pressure on the SEC in hopes of securing speedier approvals for their funds.
A spokesperson for the ICI confirms that the trade organization has been working with the SEC's Division of Investment Management on a rule that would negate the exemptive process but added that their action is not in response to the concerns of any firm in particular.
Short of lobbying, W. John McGuire
, of Morgan Lewis & Bockuis
LLP, said there are a number of things a fund firm can do to ensure a speedier process. "If the application is prepared well by competent counsel, that can help. The opposite is also true," he advised.
McGuire also pointed to an element of art in the campaign for approval: "You need to apply enough pressure that the staff knows that you are keenly interested in getting your relief quickly, but at the same time not so much pressure that you become obnoxious."
The ETF approval process may be about to get easier, though. Andrew "Buddy" Donohue
, director of the Division of Investment Management at the SEC, has taken this up as his cause.
, chairman of the investment funds group at Thatcher Proffitt
, told the MFWire
that Donohue "is committed to finding ways to streamline the process of exemptive orders (to the '40 Act)."
Only time will tell, though. "We'll see if the plan is working in the next six months," says Howard.
There are hopeful signs beginning to emerge, Robert Tull
, a senior consultant with SEC Compliance Consultants, Inc., told the MFWire
. "The process used to take about 24 months. Now it has been compressed and streamlined to about about 9-12 months," he says.
That will sure sound good to executives at ETF issuers racing to beat their competition, in what is now the "it" segment of the fund marketplace.
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