By Phil Bak, CEO of Exponential ETFs
If you look up the word exemptive in the Oxford Dictionary, you won’t find any results. The word “exemptive,” it turns out, is actually not a word at all.
ETFs have been primarily governed by the Investment Company Act of 1940, which is essentially a rule designed for mutual funds. The “40 act rule,” as the name implies, was written up almost 80 years ago in a generation that could never imagine the efficiencies and varieties of low-cost investment options that would become available to investors today.
To launch an ETF, an issuer has always had to go to the SEC to get a specific approval known as “exemptive relief” to exempt themselves from the aspects of that same “40 act” which make the fund look… well, not like an ETF. In other words, an ETF issuer gets an approval to launch a mutual fund that isn’t, governed by an ancient mutual fund rule, but exempt from the mutual fund aspects of that rule.
Get it? Don’t stress it if you don’t – the industry is on the verge of getting an exemption from the exemptive relief requirement.
Governing by the exception is an inefficient way to oversee any industry, let alone one that has become the “Silicon Valley of Finance” (hat tip to the incomparable Eric Balchunas for that one). When you govern by exemption, exceptions abound.