What’s Happening:
The SEC recently approved investment management firm, Eaton Vance Corp’s, application to launch a new type of exchange-traded fund that is not required to disclose its holdings as frequently as traditional ETFs.
Exchange-traded managed funds (“ETMFs”) are a hybrid of traditional exchange-traded funds (“ETFs”) and mutual funds. Similar to ETFs, ETMFs can trade on exchanges during the day, but like mutual funds, they are not required to disclose their holdings on a daily basis.
Advocates say ETMF’s will allow managers to keep their strategies a secret, but will take advantage of lower costs and tax efficiencies typical in the ETF space. Those who are not in favor of ETMFs say the way the funds trade could be difficult for some investors to understand and follow.
Eaton Vance plans to launch 18 of these hybrid products, called “NextShares” The firm is also preparing to license its ETMF structure to other fund companies.
What You Should Do:
If you plan to use ETMFs in your clients’ portfolios, we recommend your firm:
- Establish policies and procedures to address due diligence, trading and disclosure requirements.
- Provide training for your personnel to ensure they understand and can communicate the differences between mutual funds, ETFs and now ETMFs, especially with regard to:
- Complexity
- Cost
- Management
- Income generation
- Pricing
- Transparency
- Educate your advisors regarding suitability requirements; not all types of ETFs are appropriate for all investors.
- Establish trade reporting policies and procedures to comply with the appropriate regulatory rules.
- Review marketing and advertising communication materials.
- Establish supervisory controls to ensure employees and vendors adhere to policies and procedures.
How Oyster Can Help:
Oyster is ready to assist and guide your firm through the regulatory and compliance implications of using this new product. Our consultants have deep knowledge and experience with ETFs and mutual funds, and the regulatory requirements that accompany both. We can help you establish policies, procedures and best practices that will minimize risk and strengthen your firm’s compliance program. Oyster can also provide customized training for your personnel on Mutual Funds, ETFs and ETMFs.
