Don’t Relax On ETF Compliance, Lawyer Warns

Compliance teams should not relax their procedures as the Securities and Exchange Commission considers a proposal to liberalize the use of exchange-traded funds, according to Domenick Pugliese, partner at Paul Hastings Janofsky & Walker in New York.

The SEC on March 11 released for comment proposed Rule 6c-11, which would provide several exemptions from the Investment Company Act to permit certain ETFs to be created and operate without the need to obtain individual exemptive relief from the Commission.

Pugliese told CR that the proposal would drop several requirements but that staff should continue to comply with them to protect the firm. “A lot of prohibitions against insider trading and front-running aren’t all that necessary,” Pugliese said. “Although it would be wrong for a compliance officer to say just because the conditions are not in the new rule they don’t have to do it.”

For example, Pugliese said, the old rules require that a firewall be in place between the person creating the index and those who manage the fund. “It would be a huge mistake for compliance staff not to include this provision in their new version of policies and procedures just because it is not required.” Another example would be the requirement governing which people can sit in the same office as people who manage the portfolio, he said. “You need procedures to dictate that activity. The basics are this--ETFs need to have a code of ethics and proper compliance procedures.”

Feedback on the proposed rule is due by May 19. An SEC spokesman declined to comment.

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