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December 10, 2012

REGULATORY ACTIVITY

INVESTMENT COMPANIES-SEC Lifts Moratorium on Actively Managed ETFs' Use of Derivatives

By Amanda Maine, J.D.

The SEC announced that it will no longer defer consideration of exemptive requests under the Investment Company Act of 1940 relating to actively-managed exchange-traded funds that would make significant investments in derivatives. In March 2010, the SEC announced that it was conducting a review to evaluate the use of derivatives by ETFs, as well as by mutual funds and other investment companies.

In announcing that it would once again be considering these exemptive requests, the SEC is requiring ETFs requesting exemptive relief to include representations to address concerns the SEC had raised in March 2010. These representations include that the ETF's board will periodically review and approve the ETF's use of derivatives and how the ETF's investment adviser assesses and manages risk with respect to the ETF's use of derivatives; and that the ETF's disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission staff guidance.

The SEC, which has issued orders pertaining to 18 ETFs based on representations that no actively-managed ETF relying on the relief would invest in options contracts, futures contracts or swap agreements, announced that that it would not recommend enforcement action if actively-managed ETFs operating in reliance on those orders invest in options contracts, futures contracts or swap agreements, provided that they comply with the representations stated above.

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