On Friday, March 7, Vanguard filed for “exemptive relief” from sections of the Investment Company Act of 1940 that would allow them to offer an ETF share class of their actively managed open-end mutual funds.
But just because they have filed for this relief doesn’t mean they are about to offer ETF shares of their actively managed funds anytime soon. Vanguard has gained share in the index-based ETF space despite getting a late jump out of the starting block. There are signs that the industry may be moving in the direction of actively managed ETFs, and Vanguard wants to be ready if it does.
With this move Vanguard is getting off the bench and onto the sidelines, but is not getting into the game of actively managed ETFs—yet.
Below is a summary of the relevant portion of the March 7 filing:
A. Summary of Application
In this application (“Application”), The Vanguard Group, Inc. (“VGI” or “Adviser”), Vanguard Marketing Corporation (“VMC” or “Distributor”) and the various trusts that are listed as applicants to this application (“Trusts”), collectively, the “Applicants”) apply for and request an order under Section 6(c) of the Investment Company Act of 1940 (the “Act”) for an exemption from Sections 2(a)(32), 5(a)(1), 18(f)(1), 18(i), 22(d) and 22(e) of the Act and Rule 22c-1 under the Act and, under Sections 6(c) and 17(b) of the Act, for an exemption from Sections 17(a)(1) and (a)(2) of the Act (the “Order”). Applicants are requesting relief with respect to existing and future series of the Trusts (or other trusts that in the future may rely on this Order) that are (a) actively-managed and (b) offer an exchange-traded class of shares (such series hereafter referred to as “Applicant Funds” or “Funds”). 1 The Order would permit, among other things, (a) an existing actively-managed open-end investment company to issue an exchange-traded class of shares (“ETF Shares”) 2 [emphasis added] that are redeemable in large aggregations only (“Creation Units”); (b) secondary market transactions in ETF Shares at negotiated prices on a national securities exchange (“Listing Market”), as defined in Section 2(a)(26) of the Act, rather than at net asset value (“NAV”); (c) certain Applicant Funds that invest in foreign securities to pay redemption proceeds more than seven calendar days after ETF Shares are tendered for redemption; and (d) certain affiliated persons of the investment company and affiliated persons of such affiliated persons (“second tier affiliates”) to buy securities from, and sell securities to, such investment company in connection with the purchase and redemption of aggregations of ETF Shares (all the exemptions requested are collectively referred to as the “Relief”). 3 The Applicants believe that (a) the requested Relief is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act; (b) with respect to the Relief from Section 17(a)(1) and 17(a)(2), (i) the terms of the proposed transactions, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned, (ii) the proposed transactions are consistent with the policy of each Applicant Fund, as recited in its registration statement and reports filed under the Act, and (iii) the proposed transactions are consistent with the general purposes of the Act.
Editor Dan Wiener and Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, an award-winning monthly advisory letter that keeps subscribers abreast of recent developments at Vanguard, and provides long-term guidance for investing in the Vanguard fund family.