Ignites Features Insights from Investment Management Partner Brian McCabe on SEC ETF Rule Proposal's Fund-of-Funds Omission

The SEC’s ETF rule proposal omits a key provision of relief that could perpetuate an uneven playing field and frustrate new entrants to the market, Ignites reports in an Oct. 9 piece titled “ETF Rule's Fund-of-Funds Omission to 'Frustrate' New Entrants.” Remarks from investment management partner Brian McCabe are included throughout the piece.

Under the 1940 Act, a fund cannot own more than 3% of an ETF’s shares, unless the ETF sponsor has “fund-of-funds” relief from the Securities and Exchange Commission, Mr. McCabe outlines. Almost all legacy providers sought such relief when submitting initial applications to sell their products, he says.  The SEC usually takes about six months to approve an application for exemptive relief, Mr. McCabe notes. Requiring new ETFs to seek fund-of-funds authorization will likely prolong the amount of time it takes for those products to become profitable, he says. Historically, the SEC has been wary of fund-of-funds arrangements, due to concerns over duplicative fees and “pyramiding,” or holding so much of a fund that the acquirer can control it in ways that affect other shareholders, such as by making a large redemption, McCabe states.