The Securities and Exchange Commission (SEC) is working on a way to give ETF upstarts a big of a leg up, something that will at least partly level the playing field.

Ashley Lau and Jessica Toonkel of Reuters report that the regulatory agency has a tentative, early-stage plan to offer smaller ETF providers more flexibility in terms of how their funds mimic indexes. The wire service points to Northern Trust's FlexShares [profile], Schwab [profile], and Van Eck's Market Vectors [profile] as possible beneficiaries of the change.

Several of the earliest ETF providers (notably including the biggest: BlackRock's iShares, Vanguard, and State Street Global Advisors (SSgA)) are permitted by the SEC to substitute in a security when another is hard-to-find. That can cut down costs and work for running ETFs. Reuters says that the SEC is working on a plan that would allow new ETF players to use a similar flexibility in illiquid markets.

Six unnamed sources tell the wire service that David Bartels (an attorney in the SEC's investment management division), Dalia Blass (assistant chief counsel at the division), and Barry Perhkow (senior special counsel at the division) told ETF executives a week ago that the SEC expects to make the changes without a formal, drawn-out rule change, adding the caveat that they don't expect progress until the SEC names Norm Champ's successor. Reuters interprets that as meaning that the SEC would use no-action letters and have individual ETF providers apply to amend their exemptive orders.

The ICI and the SEC both to declined to comment to Reuters.

David Nadig, chief investment officer at ETF.com, tells the wire service that he worries that the change might lead to trading partners forcing ETF providers to take substitute securities off their hands.

Yet Marie Chandoha, president and CEO of Charles Schwab Investment Management, tells Reuters that "steps should be taken to ensure that ETF investors benefit equally."

"Regulation should not create an uneven playing field that disadvantages certain shareholders," Chandoha reportedly said. 

Edited by: Neil Anderson, Managing Editor


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