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Funds Eye Personal ETF Trading

Compliance officers at mutual fund firms are introducing tighter controls for staff who conduct personal trades in exchange-traded funds, or ETFs.

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.

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