Funds Eye Personal ETF Trading

The controls apply to so-called "access" people--those who have working knowledge of the mutual fund's trading activities.

Investors and mutual fund managers have increasingly traded in ETFs in recent years, but a Securities and Exchange Commission proposal released in March has put them in the spotlight. The proposal is expected to increase the number of ETFs coming to the market by carving out exemptions from the Investment Company Act and allowing some to be set up and operated without obtaining individual exemptive relief. The proposal would also increase the limits in which mutual funds can invest in ETFs from 10% of assets under management to up to 25%.

Chief compliance officers told CR they are re-examining their policies and procedures ahead of the proposal's expected implementation. Until now firms have not addressed personal trading in ETFs in their policies because there is no legal requirement to do so. But with ETFs growing in popularity they feel such policies are now needed.

According to CCOs, ETFs raise more potential conflicts of interest and personal trading issues than normal shares, for example in regard to front-running. Firms are changing their compliance programs by adding new, detailed language and requirements to their personal trading and conflicts of interest policies. For example, one CCO told CR her firm will make employees pre-clear all personal trades in ETFs when the ETF invests in fewer than 30 securities. Baskets with fewer securities are thought to be easier to front run.

"ETFs in recent years emerged as a nice alternative to not getting hooked into pre-clearance or personal trading requirements," a CCO at a mutual fund firm based in New York said. "They allowed for more flexibility and now that is going away."

Mike Scalzi, compliance manager at Rockville, Md.-based Rydex Investments, said his firm revised its policies in the last two months after its mutual funds started to invest more heavily in ETFs. Scalzi said his firm now requires access persons to report any personal trades involving ETFs to avoid potential conflicts of interest. He added that his firm has hired three people in the past four months to deal with the increased compliance burden and is looking to fill two more positions.  --Josh Stoffregen 

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