As announced by Norm Champ, the Director of the Division of Investment Management of the Securities and Exchange Commission (“SEC”), in a speech on December 6, 2012, and followed by a no-action letter of the same date, the SEC will no longer defer consideration of exemptive applications for actively managed exchange-traded funds (“ETFs”) that propose to invest in derivatives. The policy change comes more than two and a half years after the SEC first announced that it was reviewing funds’ use of derivatives and that it would impose a moratorium on exemptive applications for actively managed ETFs proposing to invest in futures, options or swaps and for leveraged ETFs. The policy change does not apply to leveraged ETFs, about which Champ suggested that the staff continues to have concerns.

Background -

In a press release issued in March 2010, the SEC announced that the SEC staff was conducting a review of the use of derivatives by mutual funds, ETFs and other investment companies. The press release indicated that pending completion of this review, the SEC staff would defer consideration of exemptive applications for ETFs that would make “significant investments” in derivatives.

The position resulted in a moratorium on the processing of exemptive applications for both actively managed ETFs proposing to use futures contracts, options contracts or swap agreements in their investment strategies and leveraged ETFs. The moratorium was enforced by the staff’s refusal to consider all leveraged ETF applications and applications for actively managed ETFs, unless they included an explicit representation that the ETF would not invest in futures, options or swaps.