SEC ALLOWS ETF FUND-OF-FUNDS
The SEC granted no-action relief to allow an exchange traded fund to seek its investment objective by purchasing shares of underlying ETFs rather than individual securities to achieve its stated investment objective. The underlying ETFs would represent subsets of the stated fund’s index. One significant limitation is that an investment company that invests in the fund-of-funds must do so in compliance with Section 12(d)(1) of the Investment Company Act, which limits purchases in other investment companies based on the 3/5/10 formula. The Applicant argued that the requested relief would help investors by reducing clearing and settlement transactions and ensure a more efficient secondary market.
OUR TAKE: This no-action relief involved investments in affiliated ETFs. We see no principled reason why the same flexibility should not be granted to investments in unaffiliated ETFs.