The actively managed exchange traded fund space could experience a growth spurt as NYSE Arca tries to trim the red tape associated with bringing an active ETF strategy to market.
The exchange is petitioning the Securities and Exchange Commission to amend its generic listing standards in an attempt to allow certain active exchange traded products to list without receiving permission from the regulator’s Division of Trading and Markets, reports Jackie Noblett for Financial Times.
Specifically, while a generic listing standards accommodate a range of passive ETFs, actively managed ETFs need to receive the greenlight for the 19b-4 application.
“The self-regulatory organization must provide all required information, presented in a clear and comprehensible manner, to enable the public to provide meaningful comment on the proposal and for the Commission to determine whether the proposal is consistent with the Act and applicable rules and regulations under the Act,” according to the SEC’s Form 19b-4.
The Form essentially makes a secondary review of an ETF, which can add months to a year in the approval process. Consequently, if approved, the amended generic listing standards would help active ETFs hit the markets much earlier.
“It will allow you to launch product more quickly in response to market conditions,” Stuart Strauss, partner at Dechert, said in the FT article. “You just don’t have that option in the active space right now because you don’t know if it will take four, six, eight months to go through the 19b-4 process.”
The current listing standards also provide an unfair advantage to passive ETF providers. For instance, the added time in the regulatory process would cost money and other ETFs without the 19b-4 application would come to market much more quickly.
“A delay of three months costs us money, ” Noah Hamman, chief executive of AdvisorShares, said in the article. “It’s still putting active ETFs with one arm tied behind [their]back relative to the index ETF space.”
If approved, the proposal could expedite 85% to 90% of active ETFs going through regulatory hurdles, according to Laura Morrison, global head of index and ETPs at NYSE Arca.
One reason why it has taken this long to draft a generic listing standard for active ETFs may have to do with derivatives. The use of derivatives was previously banned in new ETF launches, but the Division of Investment Management lifted a moratoroium on derivatives for active ETFs in 2012. Meanwhile, Trading and Markets kept close tabs on derivatives use in active ETFs.
The proposed rule change will not affect other exchanges, so Nasdaq and BATS exchange listings will still have to go through the 19b-4 process.
There are currently 120 U.S.-listed actively managed ETFs on the market with $18.1 billion in assets under management, which makes up less than 1% of the overall U.S. ETF industry at 1,654 listed products with $2.02 trillion in assets under management, according to XTF data. [Active ETFs Help Drive First Trust’s Growth]
For more information on the active ETF space, visit our actively managed ETFs category.
Max Chen contributed to this article.