SEC Allows ETFs to Use Indexes Managed by Affiliate
The SEC has granted No-Action Relief to allow an ETF sponsor to use a benchmark index created and managed by an affiliate. Most exemptive orders allowing the creation of ETFs prohibit the use of indexes managed by an affiliate. To obtain the no-action relief the ETF sponsor promised to maintain separate legal entities including no overlapping officers or directors and to create an information barrier between the two entities so that the affiliate ETF sponsor will not receive information ahead of other users. The ETF sponsor also provided comfort that the ETF sponsor will “not have a preferential ability to influence the index methodology” and will not seek such ability.
OUR TAKE: While this is dressed up as extending current exemptive relief, it really opens the door to actively-managed ETFs based on “indexes” that are really investment policies. Also, the market will closely monitor whether the affiliate’s ETFs miraculously outperform ETFs from other sponsors that utilize the same index.