ETF Sponsor Did Not Obtain Required Exemptive Relief
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.
OUR TAKE: Why would the SEC take action against a fund that no longer exists and an adviser that complied with conditions that would have been applicable to a fund where no investor harm was alleged? The answer is that the SEC is very serious about compliance with exemptive orders and ensuring that ETF sponsors strictly follow the conditions. Just because you are driving safely doesn’t mean you can drive without a license.