Directors of actively-managed exchange traded funds will be required to combine the talents of a regular ETF director and mutual fund director. The Securities and Exchange Commission issued orders last month for the funds to launch and it has already approved applications for actively managed ETFs from Bear Stearns Asset Management, PowerShares Capital Management, Barclays Global Investors and WisdomTree Investments.
Active ETF directors will have similar regulatory oversight responsibilities as other directors, such as the 15(c) process and ensuring proper policies and procedures are in place. But unlike a regular ETF director, whose main job beyond this is to look for deviation errors in buying index securities, active ETF directors will have to worry about evaluating manager performance, investment strategy and implementation. "Directors will have to adapt to this," said Jay Baris, partner at Kramer Levin in New York. "It will be a learning process."
These boards must ensure management is adhering to investment guidelines, oversee stock exchange issues and make sure compliance policies and CCOs are up to speed so there are no violations of the exemptive orders of the SEC. Directors overseeing active ETFs will also have to determine how to compare the fund's fees since ETFs typically have low fees while the presence of an active manager typically brings about higher fees.
Determining how to value the funds accurately throughout the day could also be a challenge depending on how portfolio holdings are disclosed. "Directors will still have the same basic responsibilities but there's another dimension to the oversight relating to the operation of the fund," said Baris. In order to keep the market price and the NAV relatively close, the market will have to know what is in the portfolio, which managers typically shy away from. "To achieve something like that they'll have to be more liberal with disclosure," said George Silfen, partner at Schulte Roth & Zabel in New York. The four approved funds have agreed to reveal holdings at the market opening the next day.
The five-member BSAM board includes three independent directors - John Cuneo, a retired investment banker who will serve as chair, Ernest Werlin, a former consultant to Horizon Asset Management and Peter Quick, former president of the American Stock Exchange. Jeffry Brown, chief development officer and director of strategic initiatives at BSAM, and Margo Cook, senior managing director and head of institutional business, will serve as interested directors. The WisdomTree board includes independent directors Gregory Barton, general counsel at Martha Stuart Living, Toni Massaro, dean at the University of Arizona James E. Rogers College of Law, and Victor Ugolyn, who serves as chair and is the former ceo of William D. Witter. Johnathan Steinberg, ceo of WisdomTree is an interested trustee. For the PowerShares fund, Bruce Bond, chairman, president and cfo, is listed as the fund's sole trustee, according to a registration filing from November. Directors for the Barclays funds could not be determined.
Trustees and representatives for the funds either declined comment due to a quiet period or did not return calls.
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