The SEC has proposed a new rule for the expedited review of exemptive applications under the Investment Company Act. Under the proposal, an applicant could request expedited review if the application is substantially identical to two other applications granted within the prior two years. If the staff agrees that expedited review is permitted, the staff will issue the notice within 45 days of filing. Additionally, the SEC has proposed a rule requiring that the staff take some action (e.g. providing comments) within 90 days of filing any exemptive application. The SEC acknowledges that lengthy reviews delay transactions, prevent firms from rapidly adapting to changing market conditions, and slow product development.
The entire industry should get behind this initiative. In fact, we would go further by requiring staff to document any objections and obtaining senior approval before kicking an applicant out of the expedited process. Regardless, let’s not make perfect the enemy of good. The SEC has acknowledged the problem with slow exemptive application reviews as far back as the early 1990s. It’s time to act.
If this rule were the only legacy of the Clayton/Blass SEC, we would consider it a success. This rule is long overdue and should level the playing field for smaller ETF sponsors burdened with the expense of obtaining exemptive relief.
The SEC voted to propose a new rule that would completely overhaul the fund-of-funds rules. Instead of relying on exemptive orders, the new rule would allow fund-of-funds structures that meet specified conditions including: (i) limitations on voting to avoid control of the underlying fund, (ii) redemption limits within 30 days of purchasing the underlying fund, (iii) evaluations to avoid excessive aggregate fees, and (iv) prohibitions on 3-tier fund-of-funds arrangements. The SEC would rescind all current fund-of-funds exemptive orders, thereby requiring all fund-of-funds arrangements to comply with the new rule. Proposed Rule 12d1-4 would provide an exemption from Section 12(d)(1) of the Investment Company Act which limits an acquiring fund from acquiring (a) more than 3% of an underlying fund, (b) an underlying fund that would represent more than 5% of the acquiring company, and (c) underlying funds that in the aggregate exceed 10% of the acquiring company. The SEC has provided a 90-day comment period.
We love the idea of an exemptive rule to allow plain vanilla fund-of-funds structures to quickly get to market without an SEC exemptive order. We hate that the SEC will rescind all current orders, which could force many current fund-of-funds into restructuring time-tested products. Since this is such a significant regulatory change, we expect a vigorous comment period.
A large ETF adviser agreed to pay a $1.5 Million fine for operating a fund without obtaining the required exemptive relief. According to the SEC, from 2010 to 2015, the adviser relied on exemptive relief for a separate ETF trust even though the SEC staff had opined that the relief did not apply to the fund at issue. The SEC asserts that both internal and outside counsel advised (incorrectly, according to the SEC) that the firm could rely on the pre-existing exemptive relief. The SEC did acknowledge that the fund complied with exemptive order requirements even though it did not obtain its own, specific relief. The offending fund was merged out of existence in 2015. An exemptive order is required to operate an ETF because it would otherwise violate various pricing provisions of the Investment Company Act.