THE EMERGENCE OF THE ACTIVELY

MANAGED ETF

Kevin S. Haeberle*

Since the first exchange-traded fund began trading in 1993,

the ETF form has attracted enormous investment flows. However,
this triumph of the ETF has been overwhelmingly limited the
world of passive investment. Due to a mix of recent market
innovation and regulatory change, this state of affairs is changing
today. As I explain in this Article, there is much reason to believe
that the actively managed ETF is now set to emerge as a
significant feature of the investment landscape. And this
emergence has important implications for, among others, the
main parties that play key roles in protecting investors (namely,
the Securities and Exchange Commission as well as investment
intermediaries).

I. Introduction ...................................................................... 1322

II. A Primer on ETFs: Innovation Accompanied by Both Pros
and Cons for Investors .................................................. 1324
A. The Core Innovation and Its Basic Liquidity
Advantage ............................................................. 1324
B. Further Advantages Beyond the Basic Liquidity
Feature .................................................................. 1328
1. Reduced Costs Associated with Operational
Savings for the Fund ...................................... 1329
2. Reduced Costs Associated with Favorable
Tax Treatment ................................................ 1331
C. Two Notable Counterweights .............................. 1333
III. ETF History Parts I and II........................................... 1334

* Professor of Law and Fellow at the Center for the Study of Law and
Markets William and Mary Law School. The author is grateful for the
comments and engagement on this Article provided at the Columbia Law
School and Columbia Business School December 2021 Future of Securities
Regulation Conference.

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1322 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

A. ETF History Part I: The Passive Age (1993 Through

at Least Mid-2020) ............................................... 1335
B. ETF History Part II: The Varied Age (Mid-2020
Forward) ................................................................ 1339
IV. The Need for the SEC and Investment Intermediaries To
Keep an Eye on Nontransparent Actively Managed ETFs
......................................................................................... 1350
A. The Main Relevant Investor-Protection Roles for the
SEC and Investment Intermediaries .................. 1350
1. The Role of the SEC ........................................ 1351
2. The Role of Securities Brokers and
Investment Advisers ...................................... 1355
B. Illustration: ActiveShares and the Robustness of
the ETF-Arbitrage Mechanism ........................... 1356
V. Conclusion ....................................................................... 1366

I. INTRODUCTION
The individual contributions to this symposium on the
future of securities regulation include thought-provoking
views of what developments are likely to be on the horizon and
how the law should approach them. In this Article, I add my
contribution along these lines, focusing on niche issues
relating to investment through exchange-traded funds. In
particular, I focus on (1) why there is much reason to believe
the actively managed exchange-traded fund (ETF) is set to
emerge as a significant feature of the investment landscape
and (2) the chief implications of that emergence for some of
the parties that play a key role in protecting investors. In so
doing, I primarily focus on what should be the main concern
in this area over the coming years: the robustness of the ETF
arbitrage mechanism that keeps ETF share prices aligned
with their underlying fund’s per-share net asset value (NAV).1

1 E.g., Henry T.C. Hu & John D. Morley, A Regulatory Framework for

Exchange-Traded Funds, 91 S. CAL. L. REV. 839, 845 (2018) (“The most
distinctive feature of the ETF is its arbitrage mechanism. The purposes of
th[e arbitrage] mechanism is to help bring together the price at which an
ETF’s shares trade on a stock exchange and the pro rata value of the fund’s

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1323

This Article’s story proceeds as follows. For decades, the

dominant form of pooled investment for ordinary, individual
investors had been that offered by open-end mutual funds.
But as described in Part II’s primer on ETF investing, things
changed on this front in the years after the first ETF came to
market in 1993. Given the extent of the triumph of the ETF
as a vehicle for passive investment described in Section III.A
and the recent regulatory approval of controversial
innovations that allowed for the first nontransparent actively
managed ETFs to trade in mid-2020 described in Section
III.B, I make the first argument noted above on the likely
emergence of the actively managed ETF. And given this likely
emergence, the final Part focuses on the aforementioned
concern relating to the robustness of the ETF arbitrage
mechanism as well as closely related concerns.2

underlying assets, which is known as its net asset value.); see also Actively
Managed Exchange-Traded Funds, No. Investment Company Act Release
No. 25,258, 66 Fed. Reg. 57,614, 57,618 (Nov. 15, 2001) (“The unique
structure of an ETF—in which [authorized participants] can buy and
redeem Creation Units at NAV, and can sell and purchase individual ETF
shares in the secondary market at market price—is designed, among other
things, to ensure arbitrage opportunities that would reduce any deviations
between the NAV and the market price of ETF shares.”).
2 In a series of public comment letters in late 2017 and early 2018, I
raised concerns about the new types of ETFs introduced above and studied
in detail below in Section III.B and Part IV, infra. See generally Kevin S.
Haeberle, Comment Letter on Proposed Rule to Adopt a New NYSE Arca
Equities Rule 8.900 and to List and Trade Shares (Dec. 15, 2017),
https://www.sec.gov/comments/sr-nysearca-2017-36/nysearca201736-
2808360-161694.pdf [https://perma.cc/BX3D-TVFC] [hereinafter Haeberle,
2017 Comment Letter on NYSE Arca Equities Rule]; Kevin S. Haeberle,
Comment Letter on Proposed Rule to Adopt a New NYSE Arca Equities
Rule 8.900 and to List and Trade Shares (Feb. 16, 2018)
https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-
3110867-161909.pdf [https://perma.cc/3LYC-DFNE] [hereinafter Haeberle,
2018 Comment Letter on NYSE Arca Equities Rule]. As noted in those
letters, I received funding from an interested party (Eaton Vance) for my
time spent on research and writing associated with those letters. I have not
discussed this current project with anyone at Eaton Vance and more
generally have not talked with anyone at that company in almost four years.
Moreover, since even before the initial May 2019 SEC approval of the type
of ETFs I had questioned, Eaton Vance filed for SEC approval for a related

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1324 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

II. A PRIMER ON ETFS: INNOVATION

ACCOMPANIED BY BOTH PROS AND CONS FOR
INVESTORS
As explained in this Part, the ETF represents a relatively
new financial innovation that brings both advantages and
disadvantages to, among others, investors who traditionally
would invest via mutual funds. The core innovation is one that
results in improved liquidity for investors, even if only in
marginal ways. But ETFs provide further notable investor
advantages—namely, reduced costs associated with both
savings for the fund and tax efficiencies. That said, ETFs also
come along with notable counterweights for investors—
namely, those associated with spreads between both (1) bid
and ask prices and (2) ETF share prices and the underlying
per-share net asset value of the fund.

A. The Core Innovation and Its Basic Liquidity

Advantage
Traditionally, mutual fund investment was the dominant
form of pooled investment for ordinary investors. But buying
and selling mutual fund shares means transacting opposite
the fund itself. These purchases and sales are executed at a
single price per share: the current per-share NAV of the fund.3
This value is calculated at the end of each trading day,4 and

ETF form. See Nichole M. Kramer, Semi-Transparent Exchange-Traded

Funds: A Revolution in Active Management, INVS. & WEALTH MONITOR,
Jan./Feb. 2020, at 33, 36,
https://investmentsandwealth.org/getattachment/8412fae0-e184-437f-
a463-cb81790e11a5/IWM20JanFeb-SemiTransparentETFs.pdf
[https://perma.cc/G2UJ-WJSY]. In Part IV below, I question the extent to
which the SEC and investment intermediaries should be supporting all of
these new types of ETFs.
3 E.g., 17 C.F.R. § 270.22c-1(a) (2021); Net Asset Value, U.S. SEC. &
EXCH. COMM’N, https://www.investor.gov/introduction-investing/investing-
basics/glossary/net-asset-value [https://perma.cc/JR7Y-RYW8] (last visited
Dec. 6, 2021).
4 E.g., INV. CO. INST., 2021 INVESTMENT COMPANY FACT BOOK: A REVIEW
OF TRENDS AND ACTIVITIES IN THE INVESTMENT COMPANY INDUSTRY 96 (2021)

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1325

all investor transactions to buy or sell shares submitted after

the previous end-of-day calculation of NAV and before that
next one are executed at the latter.5 Thus, if a mutual fund
investor redeems her shares to the fund at 3:30 p.m. on a
Tuesday, she receives the cash value of the NAV/share
calculated at the 4:00 p.m. close of trading on that day. Any
such investor who redeems shares after 4:00 p.m. on that
same day does so in return for the NAV/share calculated at
the end of the next trading day.
It follows that investment via mutual fund means a degree
of illiquidity for investors. For information-driven investors,
this can mean an inability to act on their time-sensitive
informational asset. For diversification-driven investors, it
can mean less efficient portfolio rebalancing, as by the time
the fund calculates and shares its NAV, it is too late for
investors to transact at that price.
Instead, ETFs, as indicated by their name, have shares of
their pooled-investment funds trading on exchanges
throughout the trading day.6 Since the first ETF began
trading in 1993,7 investors have been able to buy and sell
shares of this form of pooled investment fund in the open
market in real time when the market is open.8 More

(“Most mutual funds calculate their NAV as of 4:00 p.m. eastern time
because that is the time US stock exchanges typically close.”).
5 Id.
6 E.g., Exchange-Traded Funds, FINRA,
https://www.finra.org/investors/learn-to-invest/types-
investments/investment-funds/exchange-traded-fund
[https://perma.cc/4KJM-PTLG] (last visited Dec. 6, 2021) (“Like a mutual
fund, an ETF is a pooled investment fund that offers an investor an interest
in a professionally managed, diversified portfolio of investments. But unlike
mutual funds, ETF shares trade like stocks on stock exchanges and can be
bought or sold throughout the trading day at fluctuating prices.”); INV. CO.
INST., supra note 4, at 96 (“In contrast [to mutual-fund pricing], the market
price of an ETF share is continuously determined on a stock exchange.”).
7 See Actively Managed Exchange-Traded Funds, Investment
Company Act Release No. 25,258, 66 Fed. Reg. 57,614, 57,615 (Nov. 15,
2001) (noting the debut of the first ETF).
8 See id.; ETFs vs. Mutual Funds, CHARLES SCHWAB,
https://www.schwab.com/etfs/mutual-funds-vs-etfs [https://perma.cc/GXD7-
HP6N] (last visited Dec. 6, 2021).

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1326 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

specifically, like with ordinary stocks, ETFs trade in open

limit order books where market makers place bid quotes and
ask quotes around current market values.9 Investors can then
enter the market and transact against those quotes on
demand, buying against the ask quotes (generally slightly
above the current market value) or selling opposite the bid
quotes (generally just below the current market value).10
Basic liquidity advantages follow. For information-driven
traders, this structure allows for trades that immediately
capture profits based on information that is not yet fully
incorporated into market prices. For diversification-driven
traders, the structure allows for rebalancing trades to be
completed with similar immediacy.
However, the ETF structure and this improved liquidity to
which it leads requires a mechanism to tie the prices at which
ETF shares trade in the open market to the per-share NAV of
the underlying fund. This is accomplished through the core
innovation of the ETF—the introduction of Authorized
Participants (APs) into the process in which ETF shares are
created and redeemed.11
APs are authorized to transact opposite the ETF—
specifically, to engage in “creation-unit transactions”12 and
“redemption-unit transactions.”13 APs do not engage in these
transactions based on legal compulsion, but instead due to

9 Kevin S. Haeberle, Marginal Benefits of the Core Securities Law, 7 J.

FIN. REG. 254, 262–64 (2021) (discussing these general dynamics of stock
trading).
10 See id.
11 See, e.g., Hu & Morley, supra note 1.
12 INV. CO. INST., supra note 4, at 99 (“ETF shares are created when an
authorized participant . . . submits an order for one or more creation units.
A creation unit consists of a specified number of ETF shares, generally
ranging from 25,000 to 250,000 shares. The ETF shares are delivered to the
AP when the specified creation basket is transferred to the fund.”).
13 Id. at 100 (“The redemption process in the primary market is simply
the reverse of the creation process. A creation unit is redeemed when an AP
acquires the number of ETF shares specified in the ETF’s creation unit and
returns the creation unit to the fund. In return, the AP receives the daily
redemption basket of securities, cash, and/or other assets.”).

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1327

market-based incentives.14 These market incentives, along

with the traditional transparency into ETFs’ holdings, drive
AP trading that increases and decreases the number of ETF
shares in the market in a way that keeps their market prices
aligned with NAV.15
More specifically, when ETF shares are overpriced in the
market, APs have the incentive to create more of them—
thereby driving their market price back in line with their
NAV.16 For example, imagine that the per-share value of the
investments in an ETF adds up to $10.00, but that the shares
of this ETF are trading at $10.50 in the open market. In this
situation, an AP has the incentive to purchase the underlying
basket of securities that composes an ETF share that

14 See id. at 102 (“APs . . . have no legal obligation to create or redeem

the ETF’s shares.”).
15 See, e.g., id. at 99, 101 (“The creation and redemption mechanism in
the ETF structure allows the number of shares outstanding in an ETF to
expand or contract based on demand . . . . Two primary features of an ETF’s
structure promote trading of its shares at a price that approximates its
underlying value: portfolio transparency and the ability for APs to create or
redeem ETF shares at the NAV at the end of each trading day.
Transparency of an ETF’s holdings—either through full disclosure of the
portfolio or other information on the value of the securities—enables
investors to observe and attempt to profit from discrepancies between the
ETF’s share price and its underlying value during the trading day.”);
Actively Managed Exchange-Traded Funds, No. Investment Company Act
Release No. 25,258, 66 Fed. Reg. 57,614, 57,618–19 (Nov. 15, 2001) (“The
unique structure of an ETF—in which investors can buy and redeem
Creation Units at NAV, and can sell and purchase individual ETF shares in
the secondary market at market price—is designed, among other things, to
ensure arbitrage opportunities that would reduce any deviations between
the NAV and the market price of ETF shares. . . . This high degree of
transparency in the investment operations of an ETF helps arbitrageurs
determine whether to purchase or redeem Creation Units based on the
relative values of the ETF shares in the secondary market and the securities
contained in the ETF’s portfolio.”).
16 In both redemption and creation transactions, the APs are often
buying or redeeming ETF shares on behalf of distinct market participants
that are interested in engaging in ETF-arbitrage transactions. To limit
unnecessary complication, I focus almost exclusively on the AP trading
described in the text. But given the important role of these non-AP
arbitrageurs in ETF arbitrage, this additional layer of complication is worth
formally recognizing at this point in the Article.

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1328 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

(transaction costs aside) costs $10.00. This allows the AP to

accumulate and then deliver the relevant amount of securities
in-kind to the fund in return for each (currently overpriced)
ETF share sought. This new supply of ETF shares from the
fund thus results in AP selling activity in the open market
that places downward pressure on the overpriced ETF shares.
Continuing to ignore transaction costs, the AP has the
incentive to create ETF shares in this way at $10.00/share and
sell them off in the open market at higher prices (starting at
$10.50/share), until the market price of those shares reflects
the fund’s NAV (here, $10.00).
When ETF shares are underpriced in the market, APs
likewise have a market incentive to correct mispricing. In this
situation, APs can buy ETF shares in the open market and
redeem them to the fund in return for a basket of securities
that is, by definition in this situation, worth more. In such
transactions, the AP buys the underpriced ETF shares in the
open market ($9.50/share) and sells them to the fund in return
for the basket containing assets that can be sold for a higher
price ($10.00/share).17 The AP is thus incentivized to buy ETF
shares at $9.50/share in the open market and sell them back
to the fund in return for a basket of financial instruments that
it expects to be able to sell at prices beginning at $10.00/share.
This buying of underpriced ETF shares in the open market by
APs drives the price of those shares up. Transaction costs
aside, APs have the incentive to continue buying and
redeeming ETF shares for the per-share fund basket (worth
$10.00 in the above example) until the ETF shares are priced
at the value of that basket.

B. Further Advantages Beyond the Basic Liquidity

Feature
ETFs also introduced two related, yet conceptually
distinct, categories of advantages for investors: (1) reduced

17 See, e.g., Jeffrey Colon, The Great ETF Tax Swindle: The Taxation of
In-Kind Redemptions, 122 PA. ST. L. REV. 1, 14 (2017) (“ETFs permit
redemptions, but the redemptions are generally paid in kind—that is, with
securities of the ETF, and not in cash.).

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1329

costs associated with operational savings for the fund and (2)
reduced costs associated with favorable tax treatment. For
most investors, it is these advantages that make the ETF form
and its core innovation so appealing.

1. Reduced Costs Associated with Operational

Savings for the Fund
Pooled-investment funds of course incur costs associated
with pooling investor capital and deploying it toward
productive use.18 But ETFs generally incur fewer such costs
relative to mutual funds.19 In particular, mutual funds incur
the administrative costs associated with transacting in the
way described above (i.e., directly with investors), whereas
ETFs bypass these costs by trading in the way described above
(i.e., only opposite APs in large blocks20).21 At the extreme, the
issuers of a mutual fund must transact directly with a long
line of individual investors in amounts as little as a share.22
As mutual funds complete these transactions with their
investors, the funds must complete a variety of administrative

18 See Actively Managed Exchange-Traded Funds, 66 Fed. Reg. at

57,617.
19 See id.
20 See supra note 13 and accompanying text (noting the typical size of
creation-unit and redemption-unit transactions by APs).
21 Actively Managed Exchange-Traded Funds, 66 Fed. Reg. at 57,617
(“ETF expenses are often lower than the expenses of index [mutual] funds.
Because most ETF shareholders purchase and sell ETF shares through
secondary market transactions rather than through transactions with the
ETF, ETFs do not have the same degree of shareholder recordkeeping and
service expenses as index funds.”).
22 Birdthistle, supra note 22 (“ETFs do not conduct anything close to
the number of transactions with retail investors that mutual funds do.
Mutual funds must process all the purchases and redemptions of every
single investor in their fund, large or small; those transactions generate
significant costs associated with shareholder recordkeeping and managing
accounts. ETFs, on the other hand, conduct far fewer large-scale
transactions, with investors wealthy and sophisticated enough to traffic in
creation units, portfolio deposits, and redemption baskets.” (footnote
omitted)).

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1330 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

tasks in a highly regulated environment.23 The costs of these

tasks can manifest themselves in a number of fees for mutual
fund investors.24 Moreover, to reduce the extent to which they
must trade opposite individual investors in small amounts,
mutual funds often have minimum-purchase amounts and
“loads”—additional unattractive features from the investor
perspective25 that are not present in the ETF context.26
Mutual funds also have greater “cash drag” than ETFs. 27
Mutual funds have to hold cash on hand so that they can be
sure that they can meet redemption requests in a timely
manner.28 After all, they generally complete redemption
transactions by providing redeeming shareholders with
cash.29 But that means leaving an often not insignificant
amount of the money under management in cash.30 This cash

23 Id. at 104 (“Because mutual funds handle a variety of administrative

tasks associated with their funds’ investors, they charge a variety of fees.
Mutual funds or their agents are responsible for tracking the purchase and
sale of all fund shares, for generating statements to investors, for
maintaining safe custody of the fund’s assets, and for promoting the sale of
fund shares to intermediaries such as brokers and dealers.” (footnotes
omitted)).
24 Id. (“For each of these services, mutual funds charge transfer agency
fees, account maintenance fees, custodian fees, 12b-1 fees, and more.”
(footnote omitted)).
25 Fees charged by funds when an investor purchases or sells shares of
the funds are known as “sales loads” or “sales charges.” Investor Bulletin:
Mutual Fund Classes, U.S. SEC. & EXCH. Comm’n,
https://www.sec.gov/oiea/investor-alerts-
bulletins/ib_mutualfundclasses.html [https://perma.cc/85JQ-WWWP] (last
updated Feb. 6, 2017).
26 FINRA, supra note 6 (“ETFs do not have loads[.]”).
27 Birdthistle, supra note 22, at 90.
28 Id.
29 See Colon, supra note 17, at 20 (“In-kind redemptions of securities
were clearly contemplated from the genesis of the federal regulation of
mutual funds in the 1940 Act, although mutual funds almost always
redeemed shareholders with cash.” (footnote omitted)).
30 See, e.g., id. at 11–12; Birdthistle, supra note 22, at 90 (“[I]n
comparison to mutual funds, ETFs can operate with far lower cash reserves
on hand. Mutual funds typically maintain a significant cash reserve of up
to 5% to use in redeeming any investor who wishes to sell shares back to the
fund.”).

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will generally have an expected return that is significantly

lower than that of the mutual fund’s main holdings. For this
reason, for at least funds that produce sufficiently positive
returns, the cash holdings reduce investment return.31 ETFs
need not maintain these cash reserves, as they instead
generally complete redemption transactions by distributing
securities (or some mix of securities and cash) rather than just
cash.32
Two final points on these reduced costs for ETF investors
associated with operational savings for the fund bear
mentioning. First, mutual funds have been more costly to
investors because they and their once-a-day pricing have been
more susceptible to market-timing and late-trading abuses.33
Second, ETFs generally offer cost simplicity by charging
investors only a single management fee.34

2. Reduced Costs Associated with Favorable Tax

Treatment
For mutual funds (and therefore mutual-fund investors),
redemptions generally mean capital-gains tax when the fund’s
investments rise in value. In redemption transactions, mutual
funds generally provide shareholders with the dollar value of
their shares at the end of the trading day.35 So if a mutual
fund buys Company XYZ shares at $10/share and then sells
some of those shares for $30/share five years later to fulfill a
redemption request, it has generated $20 of taxable capital
gains per share. This is because the law understandably

31 See Colon, supra note 17, at 11–12, 14 (“Holding cash can cause a
fund’s return to lag behind the relevant benchmark if the return on cash is
less than the return on the fund’s securities. The lag can be quite
pronounced if the fund’s underlying investments generate returns greater
than returns on the cash.”).
32 See supra notes 13–17 and accompanying text.
33 See Birdthistle, supra note 22, at 101–03.
34 Id. at 104 (“ETFs, by contrast, are relatively free from layers of
disparate fees. Often, they charge only a single management fee, from which
they discharge any and all of their operational obligations.”).
35 See Colon, supra note 17, at 12, 24–25.

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1332 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

treats such mutual-fund gains realized in order to distribute

cash to a shareholder as a taxable event.36
In contrast, on this same redemption side, the ETF
arbitrage-mechanism generally revolves around the provision
of ETF shares from APs to the fund in return for the relevant
basket of securities.37 But the Internal Revenue Service does
not treat such in-kind transfers of securities from a fund to a
redeeming AP as a taxable event.38 Thus, distributions of
underlying investment positions that have increased in value
do not constitute a taxable event for funds or their investors.39
Moreover, ETF managers are able to select the shares with
the largest investment gains for distribution first, thereby
maximizing this avoidance of tax on capital gains.40

36 Actively Managed Exchange-Traded Funds, Investment Company

Act Release No. 25,258, 66 Fed. Reg. 57,614, 57,617 (Nov. 15, 2001) (“When
a mutual fund sells portfolio securities to pursue its investment strategies
or to generate cash for shareholder redemptions, the mutual fund may
realize capital gains if the value of the securities increased while they were
in the fund portfolio. A mutual fund distributes accumulated capital gains
to its shareholders, and shareholders generally must pay taxes on those
distributions.”); Colon, supra note 17, at 24–25.
37 Supra Section II.A.
38 Colon, supra note 17, at 25 (“In case of an in-kind redemption by an
ETF, the fund-level treatment is clear: under section 852(b)(6), the ETF
does not recognize any gain or loss.” (footnote omitted)); Actively Managed
Exchange-Traded Funds, 66 Fed. Reg. at 57,617.
39 Mutual funds too can avail themselves of this tax benefit, but
generally do not do so. See, e.g., Colon, supra note 17, at 24 (“Throughout
the history of U.S. investment companies, in-kind distributions have been
exempt from tax at the fund level. As Congress began to limit and finally
prohibit in 1986 the tax-free distribution of appreciated property by
corporations, it continued to specifically exempt open-end funds from this
rule.”). See Exchange-Traded Funds, supra note 6 (“While ETFs held in a
taxable account will generally result in less tax liabilities than if you held a
similarly invested mutual fund in the same account, there can be
exceptions.”).
40 See Colon, supra note 17, at 3 (“It is well known that ETFs
strategically distribute low-basis securities to redeeming shareholders to
substantially reduce or eliminate future fund-level capital gains.” (footnote
omitted)); see also Actively Managed Exchange-Traded Funds, 66 Fed. Reg.
at 57,617–78 (“The Redemption Basket also may include securities from the
ETF portfolio that have the highest unrealized capital gains (i.e., securities

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1333

C. Two Notable Counterweights

The above-described advantages of investing via ETF come
along with two notable disadvantages for investors: one
associated with the introduction of bid-ask spreads and the
other with that which can be referred to as “tracking spreads.”
In the mutual fund context, investors buy and sell shares
directly opposite the fund.41 These transactions therefore do
not involve market-making intermediaries and related
dynamics that introduce bid-ask spreads. However, because
ETF shares trade throughout the day in the open market,42
such spreads will generally be present.43 As with stock trading
on exchanges and most off-exchange trading platforms, ETF
transactions generally involve liquidity-taking sales and
purchases opposite, respectively, liquidity-making bid and
ask quotes.44 Those quotes are typically spread out from
current market values.45 Bid quotes are generally below the

that have appreciated in value the most while in the ETF portfolio). Because
the ETF may be able to eliminate securities with significant unrealized
capital gains from its portfolio through the redemption process, the ETF
may avoid realizing some capital gains if the ETF needs to sell securities at
a later date to track its index.” (footnote omitted)).
41 Supra note 26 and accompanying text.
42 Supra note 6 and accompanying text.
43 See Lawrence R. Glosten & Paul R. Milgrom, Bid, Ask and
Transaction Prices in a Specialist Market with Heterogeneously Informed
Traders, 14 J. FIN. ECON. 71, 72 (1985) (“[A] bid-ask spread can be a purely
informational phenomenon, occurring even when all the [market marker’s]
fixed and variable transactions costs (including his time, inventory costs,
etc.) are zero and when competition forces the specialist’s profit to zero. . . .
In effect, then, the [market maker] must recoup the losses suffered in trades
with the well informed by gains in trades with liquidity traders. These gains
are achieved by setting a spread.”).
44 See, e.g., Haeberle, supra note 9, at 271–78.
45 See, e.g., LARRY HARRIS, TRADING AND EXCHANGES: MARKET
MICROSTRUCTURE FOR PRACTITIONERS 287–88 (2003) (describing that market
makers aim to “set their bids just below fundamental values and their ask
prices just above [them].”). The bid-ask spread is the product of a number of
forces. Chief among them are a concern on the part of liquidity makers for
adverse-selection at the hands of better-informed traders and the risk of
carrying inventory in securities whose prices typically changed quickly. See,
e.g., Glosten & Milgrom, supra note 43 (providing the seminal study of the

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1334 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

current market value of a financial instrument.46 Sellers

therefore often receive something less than that value when
selling ETF shares. Ask quotes are generally above the
current market value of a stock.47 Buyers therefore often pay
more than that value to buy the stock.
ETF shares also may trade around market values (and
thus bid and ask prices) that stray from the per-share value
of the investments in the fund that they track.48 This is
because that per-share NAV is simply the aggregate value of
the underlying holdings in the fund, while the current market
value of the ETF shares is instead the value generated by
buying and selling activity in the open market.49 To be sure,
the ETF-arbitrage mechanism reduces the extent of this
“tracking-spread” problem. But the overview of that market
mechanism and the description of its largesse provided in
Section II.A should not be interpreted to be saying that this
mechanism is perfect.50 Indeed, that description of the
arbitrage mechanism had the unrealistic stated assumptions
of zero transaction costs and sufficiently robust AP creation
and redemption activity. As discussed in Part IV, these
assumptions should be called into question at least when it
comes to the trading of nontransparent actively managed
ETFs.

III. ETF HISTORY PARTS I AND II

In this Part, I explain why there is much reason to believe
that ETF history can be divided into two main parts that can
be labeled “ETF History Part I: The Passive Age” and “ETF

adverse-selection component of the bid-ask spread); Ananth Madhavan,

Market Microstructure: A Survey, 3 J. FIN. MKTS. 205, 213–15 (2000)
(discussing the inventory component of the bid-ask spread).
46 HARRIS, supra note 45.
47 Id.
48 See supra note 1 and accompanying text.
49 See supra Section II.A.
50 See Hu & Morley, supra note 1, at 843 (“The arbitrage mechanism’s
effectiveness is essential to the integrity of ETF trading prices and the
ETF’s core investment premise. And this mechanism has sometimes failed
catastrophically, even with very large and simple ETFs.”).

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1335

History Part II: The Varied Age.” I do so by first delineating

the former, which began when the first ETF hit the U.S.
market in 1993.51 I then explain why the moment at which
the first nontransparent actively managed ETFs traded in
mid-2020 is likely the line of demarcation between that period
and the second one that is currently proceeding. Given this
new period and the extent of the emergence of the actively
managed ETF that defines it predicted below, in Part IV, I
consider the road forward in this area for the SEC and key
investment intermediaries.

A. ETF History Part I: The Passive Age (1993 Through

at Least Mid-2020)
Over the past almost thirty years, the ETF innovation has
introduced meaningful advantages for investors,52 albeit
along with notable frictions for the same. 53 The extent to
which the advantages have dominated the frictions—as
evidenced by the tremendous growth in popularity in ETF
investing—is perhaps one of the more remarkable stories of
finance from the past thirty years. In that period, investment
via ETF became one of the most prominent features of U.S.
securities markets. By the close of 2020, U.S. ETFs had hit
new highs in size—with over $5.4 trillion in assets under
management54 and around nine percent of U.S. households

51 See, e.g., Actively Managed Exchange-Traded Funds, No. Investment

Company Act Release No. 25,258, 66 Fed. Reg. 57,614, 57,615 (noting the
debut of the first ETF).
52 Supra Sections II.A–B.
53 Supra Section II.C.
54 E.g., INV. CO. INST., supra note 4, at 97 (“At year-end 2020, the US
ETF market—with 2,204 funds and $5.4 trillion in total net assets—
remained the largest in the world[.]”); Simon Smith, SEC Grants
Preliminary Approval for Semi-Transparent Active ETFs, ETF STRATEGY
(Nov. 15, 2019), https://www.etfstrategy.com/sec-grants-preliminary-
approval-for-semi-transparent-active-etfs-t-rowe-price-fidelity-natixis-
blue-tractor-39504/ [https://perma.cc/JFX7-GB32] (“ETFs have become a $5
trillion-plus market in recent years with investors drawn to their tax
efficiency, low-cost structure, and convenience.”); see also Hu & Morley,
supra note 1, at 842 (“The ETF . . . now stands alongside shares of individual

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1336 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

holding ETFs.55 Moreover, that number has seen noticeable

growth in recent years.56
Through at least the end of 2020, this triumph of the ETF
has been almost completely limited to passive, index-based
ETFs.57 This is mainly because the robustness of the central
innovation of the ETF form—found in its arbitrage
mechanism that helps reduce tracking spreads58—turns on
transparency into funds’ holdings.59 Traditionally, the SEC
therefore provided the necessary exemptions that funds must

companies, mutual funds, and hedge funds as one of the most important
investments in the world.”).
55 INV. CO. INST., supra note 4, at 113.
56 Id. at 109 (“For 2020 as a whole, net share issuance of ETF shares
(including reinvested dividends) surged to a record $501 billion, up from
2019’s robust $323 billion[.]” (citation omitted)).
57 E.g., id. at 94 (noting that of the $5.4 trillion in total net assets held
by ETFs registered as investment companies at the close of 2020, $5.1
trillion was held by index-based ETFs); Smith, supra note 54 (“[T]he
overwhelming majority of ETFs are based on passive strategies.”). Notably,
these numbers include recent inflows into actively managed ETFs that
followed the developments described in Section III.B, infra. Before those
developments, actively managed ETFs had garnered an even smaller
portion of ETF investment. See Nate Geraci, Can Nontransparent ETFs
Save Active Mgmt?, ETF (June 13, 2019), https://www.etf.com/sections/etf-
strategist-corner/can-nontransparent-etfs-save-active-mgmt
[https://perma.cc/6QNN-TSYB] (“[T]ransparent actively managed ETFs are
only a sliver of the nearly $4 trillion ETF market—less than 1% (about $12
billion in assets).”).
58 See supra note 1 and accompanying text; Section II.A.
59 See, e.g., supra Section II.A; see also Smith, supra note 54 (“[D]ue to
regulatory requirements for daily portfolio transparency, the overwhelming
majority of ETFs are based on passive strategies.”).

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1337

receive to issue ETFs60 only if fund sponsors agreed to disclose

their portfolio holdings on a daily basis.61
The SEC’s concern about the extent to which ETF share
prices track their NAV without such disclosure is
understandable.62 But generally speaking, that level of
transparency does not work for actively managed funds and
their managers because it would require them to share their
“secret sauce.”63 This level of information sharing simply is

60 Before regulatory developments in late 2019, see SEC Exchange-

Trade Funds Rule, 17 C.F.R. § 270.6c-11 (2021), all ETFs required SEC
exemptions from the Investment Company Act of 1940. See Investment
Company Act of 1940, 15 U.S.C. § 80a-6 (2018) (granting the SEC discretion
to exempt companies from 15 U.S.C. § 80a-1–80a-64 or any rule or
regulation thereunder). This remains the case for more exotic types of ETFs
today, including the nontransparent actively managed ones in focus in
Section III.B and Part IV, infra. See, e.g., Notice of Application of Fidelity
Beach Street Trust, Investment Company Act Release No. 33,683, 84 Fed.
Reg. 64,140, 64,140–41 (Nov. 14, 2019) (“Due to their characteristics,
[nontransparent] ETFs (including those proposed by Applicants) are only
permitted to operate in reliance on Commission exemptive relief from
certain provisions of the [Investment Company] Act and rules thereunder.”).
For a general overview of the considerable shift in the SEC’s approach to
ETF regulation represented by Rule 6c-11, see Henry Hu & John Morley,
The SEC and Regulation Exchange-Traded Funds: A Commendable Start
and a Welcome Invitation, 92 S. CAL. L. REV. 1155 (2019).
61 See, Actively Managed Exchange-Traded Funds, Investment
Company Act Release No. 25,258, 66 Fed. Reg. 57,614, 57,619 (Nov. 15,
2001) (noting how less transparency in portfolio holdings presents
challenges for arbitrageurs).
62 The SEC highlighted its main concern relating to nontransparent
ETFs as early as 2001: “Can effective arbitrage occur without any disclosure
of the specific securities in an ETF’s portfolio (i.e., arbitrage that is based
strictly on the NAV and market price of ETF shares)?” Id.
63 See, e.g., Trevor Hunnicutt, New ETF Lets Active Managers Keep
Secret Sauce, INV. NEWS (Dec. 21, 2014),
https://www.investmentnews.com/new-etf-lets-active-managers-keep-
secret-sauce-60268 [https://perma.cc/6C96-UG5B] (noting that a
“requirement to disclose . . . underlying holdings” is a “no-go for many fund
managers, who believe the best way to maintain the value of their strategies
is to avoid telegraphing them to the market”); Geraci, supra note 57 (“Many
active managers view daily disclosure as giving away their ‘secret sauce,’
allowing other market participants to potentially reverse engineer their
strategies and erode their ‘edge.’”).

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1338 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

not good for those interested in earning revenue in return for

offering and managing active portfolios. For one thing,
rational investors generally have little interest in paying for
active portfolio management when the active strategy at issue
is freely available. For another, actively managed funds that
disclose their portfolio holdings are more susceptible to
return-damaging frontrunning by brokers and others.64
All that said, as early as 2001, there was an appetite
among fund sponsors and investment advisers for issuing
actively managed ETFs.65 But despite its willingness to
consider the matter in more detail at that time,66 the SEC
remained dubious. In fact, the agency only approved the first
actively managed ETFs years later, in 2008.67 And that
approval was limited to actively managed ETFs that agreed
to provide daily disclosure of their portfolio holdings. 68 Thus,

64 See e.g., infra note 145 and accompanying text. “Front running is the
illegal practice of purchasing a security based on advance non-public
information regarding an expected large transaction that will affect the
price of a security.” What is Front Running, CORP. FIN. INST.,
https://corporatefinanceinstitute.com/resources/knowledge/trading-
investing/front-running/ [https://perma.cc/K7WN-3EZP] (last visited Dec.
12, 2021).
65 See Actively Managed Exchange-Traded Funds, 66 Fed. Reg. at
57,615 (“Recently, the concept of an ‘actively managed ETF’ has attracted
significant attention, even though many of the details regarding the
potential operations of actively managed ETFs are apparently still in
development.”).
66 See id. (“All existing ETFs are based on various equity market
indices. An actively managed ETF would not track an index. This type of
ETF currently does not exist, and the Commission is interested in public
comments on this concept to help inform the Commission’s consideration of
any proposals for actively managed ETFs.”).
67 See Bear Steans Begins Trading of First Actively Managed ETF,
GLOB. CUSTODIAN (Mar. 25, 2008, 12:00 AM),
https://www.globalcustodian.com/bear-stearns-begins-trading-of-first-
actively-managed-etf/ [https://perma.cc/2SFL-EW7D]; Bear Sterns Asset
Mgmt., Inc., Investment Company Act Release No. 28172, 92 S.E.C. Docket
2098 (Feb. 27, 2008).
68 See e.g., INV. CO. INST., supra note 4, at 94 (“In early 2008, the SEC
granted approval through exemptive relief orders to several fund sponsors
to offer fully transparent, actively managed ETFs.” (emphasis added));
Notice of Application of Bear Stearns, Investment Company Act Release No.

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1339

despite the general appeal of ETFs to investors, only passively

managed ETFs existed in the United States for the first fifteen
or so years after the ETF first came to market.69 And even
after a narrow category of actively managed ETFs (which
required daily portfolio transparency) came to market, the
funds and fund managers who were okay with such
transparency into the funds’ investment holdings were in the
extreme minority.70 These products thus remained a
relatively insignificant feature of the ETF market until at
least mid-2020,71 leaving the period from 1993 until at least
mid-2020 one that can be fairly described under the heading
of this section, “ETF History Part I: The Passive Age.”

B. ETF History Part II: The Varied Age (Mid-2020

Forward)
After years of attempts to solve the secret-sauce problem
in a way that worked for regulators,72 in May 2019, the SEC
approved an exemption from the Investment Company Act
that paved the way for the first nontransparent actively
managed ETF.73 This product allowed open-end funds to issue

28,143, 73 Fed. Reg. 7768, 7700 (Feb. 5, 2008) (“On each Business Day,
before the commencement of trading in [ETF shares] on the Exchange, each
Fund will disclose on its website the identities and quantities of the portfolio
securities and other assets held by the Fund that will form the basis for the
Fund’s calculation of NAV at the end of the Business Day. Applicants assert
that the website disclosure of each Fund’s portfolio securities and other
assets will provide a level of portfolio transparency that is substantially
similar to that of index-based ETFs.”).
69 See INV. CO. INST., supra note 4, at 94.
70 See supra note 57 and accompanying text (noting the relatively small
amount of assets under management in actively managed funds even at the
end of 2020 when the first nontransparent actively managed funds began
trading).
71 See supra note 57 and accompanying text.
72 See infra note 116 and accompanying text.
73 See Precidian ETFs Tr., Investment Company Act Release No.
33,477, 2019 WL 12423266, at *1 (May 20, 2019); Bailey McCann, What to
Know About ‘Nontransparent’ ETFs, WALL ST. J. (May 5, 2019, 10:01 PM),
https://www.wsj.com/articles/what-to-know-about-nontransparent-etfs-
11557108061 (on file with the Columbia Business Law Review).

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1340 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

ETF shares without complying with the traditional ETF

requirement of daily disclosure of fund holdings.74 Instead,
fund sponsors who issue these “ActiveShares” are permitted
to disclose their portfolio holdings in line with standard
mutual-fund rules (quarterly, with a delay of up to sixty days
beyond the quarter end).75 This periodic, delayed disclosure
thus allows actively managed investment funds to offer ETF
shares while maintaining a strong degree of confidentiality as
to their investment advisers’ investment strategies.
The first such ETF began trading almost a year later, in
April 2020.76 But it was not alone. Late in the previous year,
the SEC had approved distinct secret-sauce-protecting ETFs

74 See, e.g., Precidian ETS Tr., 2019 WL 12423266, at *1 & n.2 (noting
the daily disclosure requirement for ETFs absent exemption) Natixis
Advisors, L.P., Investment Company Act Release No. 33,711, 2019 WL
6716048, at *1 (Dec. 10, 2019) (noting the same); see also Ben Johnson,
Active Non-Transparent ETFs: What Are They Good For?, MORNINGSTAR
(Jul. 28, 2020), https://www.morningstar.com/articles/993801/active-non-
transparent-etfs-what-are-they-good-for [https://perma.cc/57C9-DUEY]
(stating that actively managed ETFs’ “most distinctive feature is that they
do not disclose the contents of their portfolios to the public on a daily basis”);
Justin Baer, The Next Big Thing in ETFs: Less Transparency, WALL ST. J.
(July 13, 2019, 5:30 AM), https://www.wsj.com/articles/the-next-big-thing-
in-etfs-less-transparency-11563010201 (on file with the Columbia Business
Law Review) (“[F]irms . . . plan to launch exchange-traded funds that bet on
stocks without disclosing investments each day.”).
75 See, e.g., Notice of Application of Natixis ETF Trust II, Investment
Company Release Act No. 33,684, 84 Fed. Reg. 64,153, 64,155 n.16 (Nov. 14,
2019) (noting that the funds would “at a minimum, provide the quarterly
portfolio disclosures required for mutual funds”); see also Baer, supra note
74 (“The ETFs would reveal positions quarterly, as mutual funds do, to
prevent front-running of trading ideas.”).
76 E.g., STATE ST., A NEW MILESTONE FOR EXCHANGE TRADED FUNDS 2–
3 (2020),
https://www.statestreet.com/content/dam/statestreet/documents/Articles/a-
new-milestone-semi-transparent-etf.pdf [https://perma.cc/HWN8-46BJ]
(noting that first non-transparent actively managed ETFs traded for the
first time on April 2, 2020); LEGG MASON, INC., Precidian Issues Statement
on Launch of American Century ActiveShares® ETF, PR NEWSWIRE (Apr. 2,
2020, 10:24 AM), https://www.prnewswire.com/news-releases/precidian-
issues-statement-on-launch-of-american-century-activeshares-etf-
301034189.html [https://perma.cc/U7SK-CLMG] (noting the same).

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1341

that turn on the daily disclosure of proxy portfolios.77 Like

ActiveShares, they began trading in the spring of 2020.78
These ETFs too provide disclosure pursuant to mutual-fund
standards rather than traditional, more transparent ETF
ones.79
Crucially, the SEC’s move to open the door to
nontransparent actively managed ETFs was premised on the
introduction of new twists on the traditional ETF-arbitrage
mechanism. For the initially approved product, ActiveShares,
APs work through an AP representative to carry out their
price-aligning redemption and creation transactions. These
new Wall Street intermediaries serve as “trusted agents” to
the APs. In that role, they are the lone market participants
outside of the fund to be privy to the contents of the fund’s
redemption and creation basket on a daily basis. This
arrangement thus involves AP principals with AP-
representative-operated accounts. The principals are blocked
from knowing the identity and quantity of the securities held

77 See T. Rowe Price Assoc., Inc., Investment Company Act Release No.
33,713, 2019 WL 12423347 (Dec. 10, 2019) (exempting an ETF from
disclosing its portfolio holdings daily); Fidelity Beach Street Tr., Investment
Company Act Release No. 33,712, 2019 WL 6716049 (Dec. 10, 2019)
(exempting the same); Natixis Advisors, L.P., 2019 WL 6716048, at *1
(exempting the same); see also infra note 88 and accompanying text.
78 See INV. CO. INST., supra note 4, at 95 (“[B]y year-end [2020] there
were 19 ETFs with nearly $1 billion in total net assets under these approved
models.”); see infra notes 79–89 and accompanying text.
79 See, e.g., Notice of Application of Fidelity Beach Street Trust, 84 Fed.
Reg. at 64,142 n.15 (“The Funds would, at a minimum, provide the quarterly
portfolio disclosures required for mutual funds.”); Robert J. Jackson Jr. &
Allison Herren Lee, Comm’rs, Statement of Commissioners Jackson and
Lee on Non-Transparent Exchange Traded Funds, U.S. SEC. & EXCH.
COMM’N, (Nov. 15, 2019), https://www.sec.gov/news/public-
statement/statement-jackson-lee-2019-11-15 [https://perma.cc/F64Y-
J5UX]; INV. CO. INST., supra note 4, at 94 (“These ETFs, commonly referred
to as non-transparent or semi-transparent ETFs, provide limited daily
information on the value of the securities they hold and, similar to mutual
funds, publicly disclose their full schedule of portfolio holdings at least
quarterly.”).

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1342 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

in their agent’s accounts,80 even though they are the beneficial

owners of those accounts.
As with traditional ETFs, the APs for these funds (as well
as distinct arbitrageurs who trade through APs81) continue to
focus on identifying the situation where ETF shares are
overpriced or underpriced in the open market. However, when
these APs find such a mispricing, they cannot engage in
creation and redemption transactions directly. After all, they
are not permitted to know the contents of the creation and
redemption baskets. Instead, they must go through their AP
representatives to use those trusted agents’ knowledge of
those contents to enter into creation and redemption
transactions with the associated fund in the AP’s confidential
account.
More specifically, where ETF shares are overpriced in the
market, the AP directs its AP representative to buy the
creation-basket of investments in the AP’s account and
transfer them in kind to the relevant fund in return for new
ETF shares—all without the AP being able to view the
identity of those investments. Those new ETF shares are
beneficially owned by the AP as soon as they are acquired by
the AP representative from the fund. The AP can then sell
those new ETF shares in the open market (or direct its AP
representative to do the same). This selling of newly created
ETF shares, like that in more traditional AP arbitrage
activity, drives ETF share prices down toward the associated
fund’s per-share NAV.82
Where ETF shares are underpriced in the market, an AP
buys those shares (or instructs its AP representative to buy
them). Those shares are then redeemed by the AP

80 Proposed Rule Change to Adopt a New NYSE Arca Rule 8.900-E, 83

Fed. Reg. 3846, 3848 (proposed Jan. 19, 2018).
81 As in Section II.A, see supra note 16 and accompanying text, to avoid
unnecessary complication, other than the reference in the text here, I
continue focus on APs alone rather than APs and these distinct traders that
engage in ETF arbitrage activity through APs.
82 See supra note 12 and accompanying text (describing traditional AP
creation transactions).

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1343

representative to the associated fund.83 In return, that fund

provides the AP representative with the basket of securities
that corresponds to the ETF units redeemed. 84 That basket of
securities is then beneficially owned by the AP. But it is the
AP representative that must sell off each of the AP’s holdings
in the basket, as the AP is barred from knowing the contents
of that basket even after its agent acquires them for the AP’s
account. Once the AP representative liquidates the
redemption-basket securities, it provides the liquidation
proceeds to its AP principal.85
Critical to the SEC’s approval of this new type of ETF was
the publication of a “verified intra-day indicative value” (or
VIIV) that essentially represents funds’ current NAVs,
updated every second throughout the trading day.86 Thanks
to the computing and sharing of this VIIV for each relevant
fund each second, APs can spot ETF mispricings even while
operating blindly as to the identity of the holdings in the
underlying basket of investments. In short, when the VIIV is
out of line with the market price of ETF shares, the APs can
spot arbitrage opportunities that they can pursue through
their AP representatives, thereby performing the ETF-
arbitrage work traditionally performed by APs who can see
funds’ daily portfolio holdings.87
The later-approved related types of nontransparent
actively managed ETFs noted above involve distinct twists on
the traditional ETF-arbitrage mechanism. To help improve

83 See supra note 13 and accompanying text (describing traditional AP

redemption transactions).
84 Funds can also satisfy AP representative redemptions by providing
the latter with cash rather than some (or even all) of the basket of securities.
But the typical situation would be the type of in-kind redemption
transactions described in the text. See Proposed Rule Change to Adopt a
New NYSE Arca Rule 8.900-E, 83 Fed. Reg. 3846 at 3851.
85 See INV. CO. INST., supra note 4, at 100.
86 See PRECIDIAN INVS., ACTIVESHARES 8 (2020),
https://www.activeshares.com/content/dam/activeshares/documents/Active
Shares%20Brochure%205-20.pdf [https://perma.cc/P5V6-N9BD].
87 Notice of Application of Precidian ETF Trust, Investment Company
Act Release No. 33,440, 84 Fed. Reg. 14,690, 14,694 (Apr. 8, 2019); see also
supra note 1 and accompanying text, Section II.A.

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1344 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

the extent to which the shares of these ETFs track their

NAVs, the sponsors of these ETFs turn not to AP
representatives and a VIIV, but instead to the provision of
daily disclosure of a proxy portfolio noted above.88 That proxy
portfolio, rather than the actual underlying portfolio or
something close to it, serves as the basis for AP creation and
redemption transactions.89 In so doing, the proxy portfolio
helps conceal the actively managed fund’s holdings, thereby
preserving its main appeal to investors, fund sponsors, and
investment advisers.
Thus far, the rollout of nontransparent actively managed
ETFs has experienced only limited success.90 As of mid-June

88 See, e.g., Notice of Application of T. Rowe Price, Investment

Company Act Release No. 33,685, 84 Fed. Reg. 64,117, 64,120 (Nov. 14,
2019) (“Each day a Fund would publish a basket of securities and cash that,
while different from the Fund’s portfolio, is designed to closely track its
daily performance . . . . In addition, every day the Fund would disclose the
percentage weight overlap between the holdings of the prior business day’s
Proxy Portfolio compared to the holdings of the Fund that formed the basis
for the Fund’s calculation of NAV at the end of the prior business day[.]”);
Notice of Application of Fidelity Beach Street Trust, Investment Company
Act Release No. 33,683, 84 Fed. Reg. 64,140, 64,142 (Nov. 14, 2019) (“Each
day a Fund would publish a basket of securities and cash that, while
different from the Fund’s portfolio, is designed to closely track its daily
performance (the ‘Tracking Basket’). In addition, every day the Fund would
disclose the percentage weight overlap between the holdings of the prior
business day’s Tracking Basket compared to the holdings of the Fund that
formed the basis for the Fund’s calculation of NAV at the end of the prior
business day . . . . Such number would help market participants evaluate
the risk that the performance of the Tracing Basket may deviate from the
performance of the portfolio holdings of a Fund.” (footnote omitted)).
89 See Jackson Jr. & Herren Lee, supra note 79 (“APs for these funds
will have access to a ‘proxy’ portfolio that, the applicants say, gives [the APs]
enough information to keep the fund’s price in line with asset values.”
(footnote omitted)).
90 See Active Non-Transparent ETFs, ETF DATABASE (Nov. 13, 2021),
https://etfdb.com/themes/active-non-transparent-etfs/
[https://perma.cc/YLP4-3ARE] (showing only forty-two nontransparent
actively managed ETFs); Sanghamitra Saha, A Guide to Active Non-
Transparent (ANT) ETFs, NASDAQ (Apr. 19, 2021, 3:01 PM),
https://www.nasdaq.com/articles/a-guide-to-active-non-transparent-ant-
etfs-2021-04-19-0 (on file with the Columbia Business Law Review) (“The
asset class is yet to see success. Even after a year of two American Century

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1345

2021, nontransparent actively managed ETFs had just $1.5

billion in assets under management in the aggregate.91 As of
two months earlier, the nontransparent actively managed
ETF that attracted the most investment was the Fidelity Blue
Chip Growth ETF (FBCG). 92 It had just $313 million in assets
under management at that time.93 The next largest such fund
then had just $214.4 million in assets under management.94
As one news article summed it up, nontransparent actively
managed ETFs “were a hot new thing in an industry known
for innovation. . . . But in a year when practically everything
on Wall Street boomed, exchange-traded funds that hide their
strategies struggled to make a mark.”95
What comes next is unknown. But for fund sponsors and
investment advisers, there is much room for optimism. 96

product launches (the first in the United States), existing funds have
amassed about $1 billion in flows – pretty low compared with the $676
billion invested in all U.S. ETFs in the past one year . . . . There are about
40 ANT ETFs so far. . . . Current [nontransparent actively managed ETF]
assets account for just 0.3% of the amount possessed by their parent firms’
mutual funds.”).
91 John Hyland, One Year In, Active ETFs Gain Promise, ETF.COM
(June 17, 2021), https://www.etf.com/sections/features-and-news/one-year-
active-etfs-gain-promise?nopaging=1 [https://perma.cc/7CNJ-CFWX]
(“Regarding actual asset flows, the combined assets under management
(AUM) of these new style funds is about $1.5 billion. At first glance, that
seems a bit modest, particularly when ETFs as a whole brought in $500
billion in flows over roughly the same time period.”).
92 Saha, supra note 90.
93 Id.
94 Id. (describing popularity of the American Century Focused Dynamic
Growth ETF”).
95 Claire Ballentine, Secret-Strategy Funds Struggle To Win Fans in
Their First Year BLOOMBERG (Mar. 29, 2021, 7:30 AM),
https://www.bloomberg.com/news/articles/2021-03-28/secret-strategy-
funds-struggle-to-win-fans-in-their-first-year (on file with the Columbia
Business Law Review).
96 See, e.g., Geraci, supra note 57 (“All signs point to active ETFs as the
likely candidate for higher rates of future growth”); see also Saha, supra
note 90 (“Many industry experts expected high demand for [nontransparent
actively managed] funds, especially given the rising inclination toward an
ETF format over the mutual funds.”). One survey from 2019 found that
thirty-seven percent “of fund managers are planning to develop active

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1346 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

Indeed, these nontransparent actively managed ETFs have

been referred to as the “holy grail” for open-end-fund active
management.97
Self-serving industry statements aside, for four main
reasons, it is likely that considerable amounts of investment
money will flow into actively managed ETFs over the coming
years. First, a slew of large investment companies have
already signed on to issue nontransparent actively managed
ETF shares.98 Beyond even their broad marketing reach,
these companies can attempt to convert their existing actively
managed mutual fund products into actively managed ETF
ones.99 Second, it is reasonable to expect investors to, on their

ETFs.” Gerci, supra note 57. Further, Rick Genoni, who at the time was the
head of ETF product management at Legg Mason, commented that the firm
“see[s] active ETFs as the next stage of evolution of the business.” Id.
97 See Nontransparent ETF Channel, ETF.COM,
etf.com/channels/nontransparent-etfs (on file with the Columbia Business
Law Review) (last visited Dec. 9, 2021) (“Nontransparent actively managed
ETFs have been the holy grail for the ETF industry for the better part of a
decade, with many market commenters asserting that active manager
would not want to launch transparent actively managed ETFs for fear of
front-running.”).
98 Press Release, Legg Mason, Legg Mason and Clearbridge
Investments Launch Semi-Transparent ETF Using Precidian Investments’
Innovative ActiveShares® Technology (May 28, 2020),
https://www.leggmason.com/content/dam/legg-
mason/documents/en/corporate-press-releases/financial-
release/2020/release-cb-precidian-cfcv-launch.pdf [https://perma.cc/54AX-
TE5K] (noting that ActiveShares technology “has been licensed by 14
licensees, covering 26% of the actively managed U.S. equity market”);
Geraci, supra note 57 (“[As of June 13, 2019, t]he following fund companies
have already licensed ActiveShares from Precidian Legg Mason, BlackRock,
Capital Group, J.P. Morgan, Nationwide, Gabelli, Columbia and Nuveen
[and] American Century has taken the additional step of filing for
exemptive relief to launch ActiveShares ETFs.”).
99 Claire Balletine, JPMorgan is Boosting its Active ETFs With a $10
Billion Mutual Fund Switch, BLOOMBERG (Aug. 11, 2021, 8:50 AM),
https://www.bloomberg.com/news/articles/2021-08-11/cathie-wood-effect-
jpmorgan-to-convert-10-billion-mutual-funds-to-active-etfs (on file with the
Columbia Business Law Review) (“[JPMorgan Chase & Co.] plans to convert
four mutual funds with $10 billion in assets into ETFs in 2022[.[“); see also
Ballentine, supra note 95 (speculating that companies could convert mutual
funds to nontransparent ETFs).

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1347

own accord, shift a substantial amount of their capital from

actively managed mutual funds to actively managed ETFs
over time given (1) the relative advantages (tax and
otherwise) of ETFs over mutual funds 100 and (2) the fact that
nontransparent active management is now possible on the
ETF side.101 Third, now that active management without
giving away the secret sauce is possible via ETF, some
investors who have been drawn to ETFs over mutual funds
(and thus passive investment during the Passive Age) may
shift some portion of their $5 trillion-plus holdings in
passively managed ETFs to actively managed ETFs during
the Varied Age. Fourth, the new SEC rule from the fall of 2019
that makes it easier for fund sponsors to bring transparent
ETFs to market102 might lead to more fund sponsors and
managers offering transparent actively managed ETFs
(specifically, more of those who are comfortable with sharing
their secret sauce offering those actively managed ETF
products). While one might not expect many fund sponsors
and managers to proceed in this way,103 the experience with
products like target-date funds may suggest otherwise. After
all, indexed target-date funds are still offered (and sold) with
great success on the mutual-fund side even though they can
be closely replicated at lower cost thanks to the quarterly
disclosure of their underlying investment mixes.104

100 See supra Sections II.A–B (describing these investor advantages,

many of which apply even for investments made in tax-favored retirement
accounts).
101 See Ballentine, supra note 95 (“Actively nontransparent ETFs . . .
are touted by proponents as the key to sucking yet more assets from the
mutual-fund world.”).
102 See supra note 60 and accompany text (discussing adoption of 17
C.F.R. § 270.6c-11).
103 See supra Section III.A (discussing why disclosure concerns resulted
in few actively managed ETFs coming to market before nontransparent
actively managed ETFs began trading in mid-2020).
104 See David C. Brown & Shaun William Davies, Off Target: On the
Underperformance of Target-Date Funds 2, 30–31 (Nov. 1, 2021)
(unpublished manuscript),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3707755 (on file with
the Columbia Business Law Review) (documenting the lagging performance

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1348 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

On these points, it is worth noting that the often-reported

outflows from domestic-equities-focused actively managed
mutual funds are real.105 Some of these outflows are no doubt
attributable to portfolio rebalancing in a market where those
equities have greatly outperformed bonds.106 But selling out
of gains in equity-focused actively managed mutual funds to
reduce the percentage of an investment portfolio allocated to
equities and increase the percentage allocated to less risky
investments only partially explains these dynamics.107 Other
such outflows are likely associated with an increasing investor
preference for passive investment. But much of the outflows
are no doubt driven by a preference for ETFs given the
advantages they offer to investors.108 As a consequence, in the

of target-date funds (after considering fees and related considerations

including cash drag) relative to funds consisting of as little as four low-cost
ETFs that replicate the disclosed investment strategy of the target-date
funds).
105 See INV. CO. INST., supra note 4, at 57 (“Actively managed domestic
equity mutual funds had outflows in every year after 2005, while domestic
equity index mutual funds had inflows in each of these years except for
2020.”).
106 See id. at 67 (“Domestic equity mutual funds experienced net
outflows, reflecting two major factors: an ongoing shift to index-based
products and redemptions to keep equity allocations at their portfolio
targets in response to substantial gains in US stock prices during the
year.”).
107 See id. 67, 69 (“Long-term mutual funds experienced net outflows of
$486 billion in 2020, as outflows from equity and hybrid funds were only
partially offset by inflows to bond funds.”).
108 See supra Sections II.A–B (providing an overview of these
advantages). Despite all the reports of the death of active management,
active management still might dominate passive management. At the close
of 2020, sixty percent of long-term investment company assets were
managed by active mutual funds or ETFs and forty percent were managed
by passive mutual funds or ETFs. INV. CO. INST., supra note 4, at 48. That
said, one may properly question the extent to the which the money deployed
to active managers is in fact actively managed. See Jonathan Lewellen,
Institutional Investors and the Limits of Arbitrage, 102 J. FIN. ECON. 62, 77
(2011) (providing empirical evidence to support the conclusion that
“institutions as a whole seem to do little more than hold the market
portfolio”); see also Jill E. Fisch, Rethinking the Regulation of Securities
Intermediaries, 158 U. PA. L. REV. 1961, 2018 (2010) (“Many actively

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1349

coming years, outflows from actively managed mutual funds

might increasingly shift to actively managed ETFs.
All this said, one should not assume that all—or even
most—of the mutual fund money that is now actively
managed will shift to the actively managed ETF side. Much of
that money will likely stay put for four main reasons. First,
for retirement-account investment where investors are not
taxed on capital gains qua capital gains,109 the tax advantages
offered by ETFs are limited. Second, at least thus far,
nontransparent actively managed ETFs are generally
expensive relative to more traditional ETFs and perhaps even
relative to traditional actively managed mutual funds.110
Third, as I discuss next in Part IV, we might expect to see a
reluctance to pursue investment via these new types of ETFs
on the part of both investors and their advisers. For the latter,
this reluctance could come from the below-discussed legal
duties they owe to their investor clients. Lastly, and likewise
discussed below, the SEC could take action that, at a
minimum, restrains the emergence of the actively managed
ETF.

managed mutual funds hold portfolios that do not differ significantly from
the relevant index-fund benchmark. . . . Investors who purchase closet
index funds pay a premium for active management while receiving index
fund returns.”). Whatever the precise level of active management versus
passive management and whatever the equilibrium between the two one
might expect given the increased incentive to engage in active management
the more others are moving to passive management, allowing for
nontransparent actively managed ETFs helps level the playing field for
active funds seeking to better compete with passive ones.
109 Taxation of Retirement Income, FINRA,
https://www.finra.org/investors/learn-to-invest/types-
investments/retirement/managing-retirement-income/taxation-retirement-
income [https://perma.cc/3BB7-QY6H] (last visited Dec. 12, 2021).
110 See Ballentine, supra note 95 (“One issue that active
nontransparent funds face are hefty expense ratios, especially since the
industry overall is reducing costs.”); see also infra Section IV.2.B (focusing
on why the tracking-spread disadvantages of the ETF form may be
exacerbated for nontransparent actively managed ETFs.). According to
Bloomberg, costs for nontransparent funds range from charges of 0.39% to
0.90%, while some active ETFs charge less than 0.30%. Ballentine, supra
note 95.

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1350 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

In sum, the future of the actively managed ETF remains

uncertain. But absent restraint arising from the law, there is
much reason to believe that the recently approved market
innovations that cure the decades-old secret-sauce problem
will lead to a significant emergence of the actively managed
ETF over the coming years. This emergence, combined with
the traditional dominance of passively managed ETFs and
large inflows into the same in recent years, makes it fair to
label the current period, which began as early as mid-2020, as
“ETF History Part II: The Varied Age.”

IV. THE NEED FOR THE SEC AND INVESTMENT

INTERMEDIARIES TO KEEP AN EYE ON
NONTRANSPARENT ACTIVELY MANAGED ETFS
During the Passive Age, the main downsides to ETF
investing (the introduction of tracking spreads and bid-ask
spreads)111 were generally of limited significance, albeit with
notable disconcerting exceptions.112 As demonstrated in this
Part, the SEC as well as securities brokers and investment
advisers should keep an eye on the extent to which the new
mechanisms that have been promised to cure the special-
sauce problem do so without introducing countervailing
problems along these dimensions. I make these points in
Section A by focusing broadly on the main relevant investor-
protection roles of the SEC and these investment
intermediaries. I then illustrate those points in Section B
below by returning to the fine-grained focus from Section III.B
on ActiveShares, the first-approved nontransparent actively
managed ETF form and its ETF-arbitrage mechanism.

A. The Main Relevant Investor-Protection Roles for the

111 Supra Section II.C.

112 See Antti Petajisto, Inefficiencies in the Pricing of Exchange-Traded
Funds, 73 FIN. ANALYSTS J., First Quarter, 2017, at 24, 25 (documenting
significant mispricings of ETFs); Hu & Morley, supra note 1, at 843 (noting
that the ETF-arbitrage “mechanism has sometimes failed catastrophically,
even with very large and simple ETFs.”).

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1351

SEC and Investment Intermediaries

Both the SEC and investment intermediaries have
investor-protection roles that will be triggered by the above-
predicted emergence of the actively managed ETF.

1. The Role of the SEC

The SEC has a good deal of discretion with respect to
nontransparent actively managed ETFs. At the most basic
level, those ETFs require an SEC exemption to come to
market113 as well as a distinct SEC exemption to trade in the
national market system.114 As the SEC stated in granting the
former exemption for ActiveShares to come to market, the
availability of that exemption turns on “the extent that such
exemption 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
Investment Company Act.”115
Notably, the exemptions for these new products were not
granted overnight. To the contrary, they were granted only
after a lengthy series of unsuccessful proposals.116
Eventually, those behind the proposals persevered by
addressing enough of the concerns of a majority of the

113 See supra note 60 and accompanying text (noting that

nontransparent ETFs fall outside of the new, more permissive approach to
ETFs found in Rule 6c-11 from 2019).
114 See, e.g., Order Granting Limited Exemptions to Exchange Act
Section 11(d)(1) to ActiveShares, Release No. Exchange Act Release No.
88,301A (Feb. 28, 2020).
115 Notice of Application of Precidian ETFs Trust, Investment
Company Act Release No. 33,440, 84 Fed. Reg. 14,690, 14,691 (Apr. 8, 2019)
(quoting Section 6(c) of the Investment Company Act.).
116 See, e.g., Notice of Application of T. Rowe Price, Investment
Company Act Release No. 33,685, 84 Fed. Reg. 64,117, 64,117 (Nov. 14,
2019) (noting filing of the original application on September 23, 2013, with
seven amendments filed from 2014 through 2019). Notably, amendments in
this area typically follow, at a minimum, the raising of issues and objections
and related indications of expected rejection from the SEC. See, e.g., id.

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1352 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

commissioners in office at the time117 and by agreeing to

ongoing disclosure to help the SEC monitor the performance
of these new products.118 But even in granting the
exemptions, the SEC remained cautious.119 In the end, one

117 See Final Commission Votes for Agency Proceedings: Calendar Year
2019, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/about/commission-
votes/annual/commission-votes-ap-2019.xml (on file with the Columbia
Business Law Review) (last visited Dec. 11, 2021) (noting that the
Investment Company Act exemption for the initial nontransparent actively
managed ETF proposal that the SEC approved on May 20, 2019 (that for
ActiveShares) passed by a three-to-one vote along party lines). See
generally, Precidian ETF Trust, Investment Company Act Release No.
33,477, 2019 WL 2176712, at *1 (May 20, 2019) (ordering SEC approval of
the ActiveShares proposal); Jackson Jr. & Herren Lee, supra note 79 (“Each
fund’s portfolio will only include securities that trade on an exchange, and
the fund will establish thresholds for tracking error and bid-ask spreads,
with the board taking needed action if the thresholds are crossed.”).
118 See, e.g., Notice of Application of T. Rowe Price, 84 Fed. Reg. at
64,123 (stipulating that the SEC’s approval of the novel nontransparent
actively managed ETF at issue requires that “[e]ach Fund will provide the
Commission staff with periodic reports . . . containing such information as
the Commission staff may request.”).
119 E.g., id. at 64,122. The SEC noted:

In considering relief from [Investment Company Act]

section 22(d) and rule 22c-1 for ETFs, the Commission has
focused on whether the ETFs’ arbitrage mechanism
addresses the concerns underlying those provisions. The
Commission believes that the alternative arbitrage
mechanism proposed by Applicants can work in an efficient
manner to maintain a Fund’s secondary market prices close
to its NAV. The Commission recognizes, however, that the
lack of full transparency may cause the Funds to trade with
spreads and premiums/discounts [relative to NAV] that are
larger than those of comparable, fully transparent ETFs.
Nonetheless, as long as arbitrage continues to keep the
Fund’s secondary market price and NAV close, and does so
efficiently so that spreads remain narrow, the Commission
believes that investors would benefit from the opportunity
to invest in active strategies through a vehicle that offers
the traditional benefits of ETFs.
Id. (footnotes omitted); id. at 64122 n.33 (“The performance of a Fund’s
Proxy Portfolio and portfolio holdings may deviate to some extent, which
would make market participants’ estimates of the profitability of their

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1353

can view this victory by those in favor of this new form of

investment as more the product of the regulators’ inclination
to give the market a chance to tell all involved the extent to
which these new ETFs will be welfare-enhancing for
investors, and less of the product of belief that the ETFs will
in fact serve that end. Indeed, for those who have followed the
SEC over the past decade, the regulatory approach might
loosely resemble that embodied in the increasingly popular
pilot approach deployed in other controversial areas.120
However the SEC’s approach to these ETFs should be
properly described, it is fair to say that a market experiment
is following the regulatory approval introduced above and that
this current and ongoing experiment should continue to be
closely monitored by the SEC. In particular, if the tracking
spreads and bid-ask spreads associated with nontransparent
actively managed ETFs prove too problematic, the SEC’s prior
decision to permit these market experiments pursuant to the
above-noted standard should not justify continued exemption
from the Investment Company Act. The same applies to the
Exchange Act exemptions that allow for these shares to trade
in the national market system.121 For example, the fruition of
the problems discussed below in Section IV.B during periods
of illiquidity would cut in favor of an end to the
nontransparent actively managed ETF market experiment.

arbitrage transactions less precise. To account for this possibility, market

participants would likely require wider spreads to trade Shares.”).
120 See, e.g., INV. ADVISORY COMM., R ECOMMENDATION OF THE INVESTOR
ADVISORY COMMITTEE: DECIMALIZATION AND TICK SIZES, 6–7 (2012),
https://www.sec.gov/spotlight/investor-advisory-committee-
2012/investment-adviser-decimilization-recommendation.pdf
[https://perma.cc/GKZ5-CMTX] (recommending against pilot program
increasing tick size for stocks); Order Approving the National Market
System Plan To Implement a Tick Size Pilot Program, Exchange Act
Release No. 74,892, 80 Fed. Reg. 27,514 (May 6, 2015) (approving the
implementation of the tick size pilot program); N.Y. Stock Exch. LLC v.
SEC, No. 19-1042, 2020 WL 6020771 (D.C. Cir. June 16, 2020) (rejecting the
SEC’s plan to implement a pilot program to test trading with lower fees and
rebates for liquidity-making and liquidity-taking for brokers).
121 See supra note 114 and accompanying text.

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1354 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

To be sure, the SEC is watching and has already achieved

a number of safeguards in addition to those described in
Section III.B.122 But at some point, there will be sufficient
market data on the tracking spreads and bid-ask spreads
(including during times of unusual market stress) of these
new ETFs such that the Commission in office at the time
might find that monitoring and those safeguards to be
insufficient to protect at least ordinary, individual investors.
More generally, one might still wonder whether all of this
involves a desirable use of government resources—including
those required for the SEC and others to monitor and enforce
the types of issues I note in this Section. For one thing, it is
far from clear that the benefits investors will receive from
ETF-based active management dominate the costs traceable
to the same.123 For another, even to the extent that quality
actively managed products dominate for investors, it is
likewise unclear that these products are socially desirable.
After all, the advantages of ETF investing described in
Sections II.A and B are those specific to investors. For society,
the advantages of ETF investing are less clear. Indeed, the tax
benefits described in Section II.B.2 have no doubt played a
considerable role in the triumph of the ETF from its inception
in 1993 through to today. Yet, the desirability of those tax
advantages for investors must be distinguished from the very
questionable desirability of the same for society.124
Thus, one might not be surprised to see that the SEC has
allocated a good deal of scarce government resources toward

122 See, e.g., Notice of Application of Fidelity Beach Street Trust,

Investment Company Act Release No. 33,683, 84 Fed. Reg. 64,140, 64,144–
45 (Nov. 20, 2019) (detailing remedial measures that the funds and their
adviser must take “if the funds do not function as anticipated”).
123 The main quality that matters in the active-management context
more generally relates to the expectation of profits net of the costs of that
management. For decades, there has been a debate on the extent to which
actively managed investment funds generate risk-adjusted returns net of
the fees they charge that outpace the returns from passive investing net of
its far lower fees. See, e.g., Brown & Davies, supra note 104, at 2–3.
124 As its title suggests, Jeffrey Colon’s “The Great ETF Tax Swindle,”
supra note 17, provides an in-depth critique of the current approach to ETF
taxation.

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1355

bringing about the current market experiment for

nontransparent actively managed ETFs. But to the extent
these products (1) turn out to raise costs for investors without
bringing them sufficient benefits or (2) are merely desirable to
investors due to a tax dodge (and not due to the financial
attractiveness of active management via a more liquid and
perhaps less costly form), it becomes harder to appreciate why
the SEC should continue its work in this area. In sum, it is
understandable why so many in the fund industry care about
these new products and their success. But the government’s
interest (independent of direct and indirect industry pressure)
is less clear.

2. The Role of Securities Brokers and Investment

Advisers
Similar monitoring is appropriate for key investment
intermediaries—namely, investment advisers and securities
brokers. Securities brokers have a duty to provide retail
investors with recommendations that are in the best interest
of those investors.125 This general best-interest obligation
owed by brokers is one that includes several “component
obligations,” including a “care obligation.”126 As stated in the
SEC’s adopting release for Regulation Best Interest:
Under the Care Obligation, a broker-dealer must
exercise reasonable diligence, care, and skill when
making a recommendation to a retail customer. The
broker-dealer must understand potential risks,
rewards, and costs associated with the
recommendation. The broker-dealer must then
consider those risks, rewards, and costs in light of the
customer’s investment profile and have a reasonable
basis to believe that the recommendation is in the

125 Regulation Best Interest: The Broker-Dealer Standard of Conduct,

84 Fed. Reg. 33,318, 33,330 (July 12, 2019) (to be codified at 17 C.F.R. pt.
240) (“[T]he retail investor will be entitled to a recommendation (from a
broker-dealer) . . . that is in the best interest of the retail investor and that
does not place the interests of the firm or the financial professional ahead
of the interests of the retail investor.”).
126 Id. at 33,320.

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1356 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

customer’s best interest and does not place the broker-

dealer’s interest ahead of the retail customer’s
interest. A broker-dealer should consider reasonable
alternatives, if any, offered by the broker-dealer in
determining whether it has a reasonable basis for
making the recommendation.127
The main frictions introduced by nontransparent actively
managed ETFs may make those products inimical to the best
interests of many retail-level investors. The failure to uphold
these obligations of course can result in liability for brokers.128
Brokers will thus have to proceed with caution before
directing those investors to these new ETFs in place of, for
example, more traditional managed mutual funds (whether
actively or passively managed) or more traditional ETFs (i.e.,
ones without the ETF-arbitrage frictions in focus in this
article). The same general principles apply to investment
advisers.129 Thus, in addition to whatever further action the
SEC opts to pursue in this area to protect investors, securities
brokers and investment advisers should closely monitor the
robustness of the new nontransparent actively managed
ETFs—and do so with the considerations discussed in this
Article in mind. Any defense of “the SEC permitted the
products” should be insufficient to protect these brokers and
investments advisers from legal actions by, among others, the
Financial Industry Regulatory Authority (FINRA), private
plaintiffs, state attorney generals, and even the SEC itself.

B. Illustration: ActiveShares and the Robustness of the

127 Id. at 33,321.

128 Id. at 33,418–21.
129 See, e.g., Commission Interpretation Regarding Standard of
Conduct for Investment Advisers, 84 Fed. Reg. 33,669 (July 12, 2019);
Regulation Best Interest, 84 Fed. Reg. at 33,321 n.23 (“[A]n investment
adviser’s fiduciary duty under the Advisers Act comprises a duty of care and
a duty of loyalty. This combination of care and loyalty obligations has been
characterized as requiring the investment adviser to act in the ‘best interest’
of its client at all times.”).

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1357

ETF-Arbitrage Mechanism
The desirability of heightened monitoring by the SEC and
investment intermediaries is illustrated by taking a fine-
grained look at perhaps overlooked costs that are likely to
impede the robustness of the price-alignment process for
ActiveShares. These costs include those incurred by firms in
order to provide AP representative services as well as those
incurred by APs to monitor these new Wall Street
intermediaries. Both of these costs may ultimately be borne
by the APs in a way that reduces the incentive to engage in
sufficient ETF-arbitrage activity, thereby increasing both
tracking spreads and bid-ask spreads for these ETFs.
At the most basic level, the provision of AP representative
services is not free for the firms that offer those services. To
stay in the AP representative line of business, these firms
must of course cover their costs. One notable industry
participant (State Street) publicly shared its thoughts on the
scope of these costs: “Do not underestimate the work required
to establish the new APR role. . . . Even with all of our
experience servicing ETFs, the APR role was new and
different. . . . Receiving the fund’s confidential portfolio
information is a monumental undertaking not to be dealt with
lightly.”130
Looking more closely at the AP representative role reveals
particularly notable compliance costs that might not be fully
appreciated today. Two such costs are (1) those associated
with avoiding insider trading violations and (2) those
associated with avoiding illegally frontrunnnig funds and
clients.
“Insider” trading law is of course often less about trading
by c-suite insiders and more about trading by anyone
(director, officer, or complete outsider) on material, non-public
information in ways that are said to constitute “deceit.”131

130 STATE ST., supra note 76, at 4.

131 The typical focus on insider trading law in the scholarly literature
on securities law is that embodied in judicial interpretations of section 10(b)
of the Securities Exchange Act, 15 U.S.C. § 78j(b) (2018), and Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5 (2021). Although less

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1358 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

Relevant here, section 10(b) and Rule 10b-5 are read to

prohibit the deceptive misappropriation of material, non-
public information from its source for trading use.132 And it is
said to be deceitful when a person takes material, non-public
information from its source—despite a duty to keep it
confidential—and then uses that information to purchase or
sell a security (or tip others with an eye on the same).133 These
forms of securities deceit are prosecutable both civilly (by the
SEC and/or private plaintiffs) as well as criminally (by the
DOJ).134
Trading by AP representatives should invoke concern for
illegal misappropriation-type insider trading. To complete
their trading on behalf of APs, AP representatives receive
confidential information (i.e., that about the portfolio holdings
of the ETFs).135 AP representatives therefore have access to
information that the market more generally lacks. Moreover,
they have it throughout each trading day of the year. At a
minimum, to the extent that the holdings of nontransparent
actively managed funds are likely to outperform the market,
having access to that information is valuable. At times, this

prominent in that literature, section 17(a) of the Securities Act of 1933, 15

U.S.C. § 77q is also relevant to insider selling. Likewise, under-emphasized
federal prohibitions on mail and wire fraud also often sit at the center of
criminal prosecutions in the area. See 18 U.S.C. § 1341; See generally
William K.S. Wang, Application of the Federal Mail and Wire Fraud
Statutes to Criminal Liability for Stock Market Insider Trading and
Tipping, 70 MIAMI L. REV. 220, 222 (2015).
132 See United States v. O’Hagan, 521 U.S. 642, 652–53 (1997).
133 Id. at 651–52. Arguably, the tipping activity is only deceitful when
the tipper expects to receive a personal benefit in return for the tip. See
Dirks v. SEC, 463 U.S. 646, 662 (1983). But see Merritt B. Fox & George N.
Tepe, Personal Benefit Has No Place in Misappropriation Tipping Cases, 71
SMU L. REV. 767, 768 (2018) (arguing that the personal benefit
requirement, while part of the classical theory of insider trading, should not
be inserted into the misappropriation theory of insider trading).
134 See 15 U.S.C. § 78ff (criminalizing “willful” violations of most
Exchange Act provisions).
135 See supra notes 82–83 and accompanying text.

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1359

information will be sufficiently valuable to make it

“material.”136
AP representatives work under agreements that bar them
from trading on this portfolio information and from tipping
others to do the same.137 Under insider-trading law as it is
understood today, AP representatives therefore owe a duty of
trust and confidence to the source of that information (the
funds).138 Yet, mere possession of material, non-public
information while trading in relevant securities involves the
use of that information.139 Trading while in possession of
material, non-public information while operating under an
agreement that bars a party from trading on confidential

136 See TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)
(defining a material fact in the context of alleged fraudulent proxy
statements under Exchange Act Rule 14a-9 as one where “there is a
substantial likelihood that a reasonable shareholder would consider it
important in deciding how to vote[]”—and thereby laying the foundation for
the definition of materiality under the federal securities laws more
generally).
137 See Proposed Rule Change to Adopt a New NYSE Arca Rule 8.900-
E, 83 Fed. Reg. 3846, 3852 n. 23 (proposed Jan. 19, 2018).
138 The relevant duty first arose under the common law out of
relationships of trust and confidence between counterparties to a
transaction. But these duties were then greatly expanded in the insider-
trading context via purported statutory interpretation by federal judges.
See, e.g., United States v. Chestman, 947 F.2d 551, 567–70 (2d Cir. 1991).
Today, the duty at issue is also traceable to an SEC rule. 17 C.F.R. §
240.10b5-2 (2021).
139 See 17 C.F.R. § 240.10b5-1(b) (“[A] purchase or sale of a security of
an issuer is ‘on the basis of’ material non-public information about that
security or issuer if the person making the purchase or sale was aware of
the material nonpublic information when the person made the purchase or
sale.”). Similarly, caselaw provides that “when an insider trades while in
possession of material nonpublic information, a strong inference arises that
such information was used by the insider in trading.” SEC v. Adler, 137 F.3d
1325, 1337 (11th Cir. 1998). The extent to which this caselaw is preempted
by the aforementioned SEC rule is unclear. For ease of exposition, here
forward I focus only on the SEC rule when thinking about the extent to
which possession of confidential fund information means the use of it by AP
representatives.

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1360 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

information is thus illegal when affirmative defenses 140 are

not available.
Of course, those prosecuting such an insider-trading case
also need to prove additional elements. But when the
information at issue is material, the key duty and use
elements are met due to the mix of the confidentiality
agreement, the trading and/or tipping, and the possession of
the information during the time of that trading and/or tipping.
Yet, Rule 10b5-1 contains no apparent affirmative defense for
this AP representative trading.141 And given the scope of the
emergence of investment via actively managed ETF (namely,
via nontransparent actively managed ETF) predicted
above,142 AP representatives could have information relating
to the demand for every publicly traded stock in the market
each and every trading day of the year. Consequently, AP
representatives can even be said to be acting in a way that is
presumptively inconsistent with these same standards when
those representatives are merely engaging in the brokering
activity on third-party trading platforms at arm’s length that
the AP-representative arrangement contemplates. As a
technical matter, even merely assisting the APs in their ETF-
arbitrage creation and redemption transactions dictates that
AP representatives are trading “on the basis of” confidential
portfolio information when they transact in shares of the
securities in the underlying creation and redemption basket.
After all, the possession of such information while trading in
relevant securities equals its use under the law.
To be sure, the analysis in the immediately preceding
paragraph could be said to be exceedingly technical. And
“materiality” of the information at issue is far from clear. But
even if so and prosecutors, private plaintiffs, the SEC, and
FINRA had no issue with such trading, closely related
problems remain. For example, an AP representative would
be proceeding on very thin ice if it used shares from its own

140 See 17 C.F.R. § 240.10b5-1(c) (specifying affirmative defenses).

141 See id.
142 See supra Section III.B.

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1361

inventory (i.e., as a broker-dealer143) to help assemble some of

the shares required for a creation-unit transaction. In this
situation, the AP representative would be selling those shares
to the AP (as beneficial owner) while having knowledge of the
funds’ trading patterns with respect to the security at issue.
Yet, that AP representative possession of that information—
at least if material—constitutes its use. By buying these
shares for the AP from its own inventory, the AP
representative would thus be violating insider trading law.
Further, the logic (even if not current application) of the
misappropriation theory of insider trading suggests that
securities deceit may be found even where the information
secretly misappropriated and used for trading purposes is
valuable, yet not quite “material.” In this situation, the
valuable information can said to be deceptively
misappropriated in connection with the purchase or sale of a
security because the information was secretly used for trading
purposes—thereby violating the prohibition on deceit in
connection with the purchase or sale of a security found,
among other places, in section 10(b) of the Exchange Act.144
Thus, the logic of section 10(b) and Rule 10b-5’s prohibition on
deceptive misappropriation of material, non-public
information could be argued to apply equally to the
misappropriation of other valuable confidential information
that falls short of being deemed “material,” as that term of art
is defined. If that is the case, then use of confidential fund
information by AP representatives could give rise to legal
sanction under a more liberal interpretation of section 10(b)
and Rule 10b-5 as well.
Closely related concerns exist with respect to trading with
the help of fund information even when that trading does not
rise to the level of illegal insider trading. For example, the AP
representatives will also have to undertake efforts to comply

143 See Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(5) (2018)

(defining “dealer” as “any person engaged in the business of buying and
selling securities . . . for such person’s own account through a broker or
otherwise.”).
144 See 15 U.S.C. § 78j(a)(2)(b).

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1362 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

with rules barring frontrunning.145 Whether labeled as

“deceit” or “frontrunning,” it is clear that AP representatives
have an incentive to use the confidential portfolio information
in their possession to frontrun funds and/or AP clients (or tip
others to do the same). The incentive broker-dealers have to
frontrun customers’ orders exists today even when they have
only limited information as to the customers’ holdings (e.g., a
single mutual fund is interested in selling a block of Oracle
stock this week). Securities regulators and institutional
investors have long allocated significant resources to police
and curb front-running activity. Yet, when it comes to
nontransparent actively managed funds, the information at
issue is the composition of the funds’ entire portfolio—and not
just a single security or smalls set of securities, as in the more
traditional basic frontrunning case. And if AP representatives
are to achieve any kind of efficiency with respect to their
narrow line of business, they will have such information for a
large number of funds. AP representatives can thus use their
inside knowledge of funds’ trading patterns to anticipate those
funds’ likely future purchases and sales of securities, and
frontrun them profitably in a way that is perhaps far more
disconcerting than that present in more traditional
frontrunning contexts.
Moreover, AP representatives working as broker-dealers
are operating on the sell-side of Wall Street. They therefore
have the incentive to pass along valuable frontrunning
opportunities to those who might buy their liquidity services
in the future. In short, for at least broker-dealers, having
access to the funds’ confidential portfolio information means
having access to valuable information not just for themselves
directly, but also for non-AP clients of the broker-dealer firm.
Of course, AP representatives operate walled off from their
intra-firm and extra-firm colleagues.146 Questioning the
extent to which traditional Wall Street walls erected between
investment bankers and sell-side colleagues at the same firm
are sufficiently robust is beyond the scope of this Article. But

145 See FINRA MANUAL r. 5270 (Fin. Indus. Regul. Auth. 2021).
146 See supra Section III.B.

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1363

the idea that AP representative broker-dealers will be able to

be sufficiently separated from their fellow sell-side colleagues
performing more general broker-dealer services at the same
firm is fair to question here.
Lastly, APs themselves will be in the dark on the contents
of the creation and redemption baskets. They will therefore be
less able to monitor the extent to which their trusted agents
are acting in the interests of the APs as opposed to pursuing
their own distinct interests. For example, APs will have
difficulty determining the extent to which AP representatives
are providing them with “best execution” as required under
both FINRA rules and state common law.147 The APs will not
be able to engage in any kind of real-time (or even proximate-
time) monitoring of the extent to which the shares
accumulated by AP representatives in a creation-basket
transaction are in fact purchased at prices that are consistent
with those brokers-dealers’ duty of best execution.148 The
same goes for policing the best-execution by AP
representatives when those broker-dealers are selling
redemption-basket securities on behalf of the AP to assist the
AP in redeeming ETF shares in return for the liquidated value
of the securities in that basket.149 Given well-established
concerns about broker-dealer conflicts in today’s market (e.g.,
those relating to the incentive to route orders to the broker-

147 See FINRA MANUAL r. 5310(a)(1) (Fin. Indus. Regul. Auth. 2021)
(“In any transaction for or with a customer . . . a member and persons
associated with a member shall use reasonable diligence to ascertain the
best market for the subject security and buy or sell in such market so that
the resultant price to the customer is as favorable as possible under
prevailing market conditions.”). For prominent examples of the common law
best-execution standard, see In re Merrill Lynch, 911 F. Supp 754, 760–61
(D.N.J. 1995); id. at 769. (“A broker-dealer’s duty to seek to obtain the best
execution of customer orders derives from the common law agency of loyalty,
which obligates an agent to act exclusively in the principal’s best interests
. . . .” (citations and quotation marks omitted) (alteration in original)).));
Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270–
71 (3d Cir. 1998) (“The duty of best execution, which predates the federal
securities laws, has its roots in the common law agency obligations of
undivided loyalty and reasonable care that an agent owes to his principal.”).
148 See supra notes 72–75 and accompanying text.
149 See id.

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1364 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

dealer’s own dark pool150 or to trading platforms that provide

the highest rebates to the broker rather than the best
execution for the client151), the above-raised issues should not
be dismissed without careful study.
It follows that firms offering AP representative services
will be operating on thin ice with respect to insider trading
law as well as broker-dealer-specific areas of regulation. They
will therefore have to incur significant costs to avoid violating
the law. All of this is not to say that the introduction of the
VIIV is not helpful.152 But the ETF-arbitrage process
envisioned for nontransparent ETFs with the help of this VIIV
only works if the market incentive to engage in AP
redemptions and creations is sufficient. And that incentive is
only as good as the ability to carry out the AP function
profitably. Yet, performing AP representative duties is not
free. And, like most principals, APs will find it in their interest
to monitor their agents. To the extent that all of these costs

150 See, e.g., Scott Patterson, The Questions Hovering over Dark Pools,
WALL ST. J. (JUNE 16, 2013, 3:33 PM), https://www.wsj.com/amp/articles/BL-
MBB-2405?responsive=y (on file with the Columbia Business Law Review)
(“Because the firms benefit from executing as many trades in their dark pool
as possible, they have an incentive to route as many possible orders to their
own venues.”); Kristin N. Johnson, Regulating Innovation: High Frequency
Trading in Dark Pools, 42 J. CORP. L. 834, 867 (“[C]onflicts of interest
abound in dark pools.”).
151 See generally MERRITT B. FOX, LAWRENCE R. GLOSTEN & GABRIEL V.
RAUTERBERG, THE NEW STOCK MARKET: LAW, ECONOMIC, AND POLICY 281–
288 (2019) (discussing maker-taker fees under the current structure of the
stock market).
152 It is worth noting that the VIIV, even if calculated based on the
midpoint price of the bid-ask spread for each portfolio holding, see Alger,
Verified Intraday Indicative Value (VIIV) Price Calculation & Methodology,
https://www.alger.com/AlgerDocuments/Viiv_Methodology.pdf
[https://perma.cc/2HHB-R3A4] (last visited Jan. 16, 2022), is not an exact
replication of the cost an AP or arbitrageur would face in, for example,
accumulating portfolio holdings in order to engage in a creation-unit
transaction. This is because the true price to accumulate the underlying
holdings in significant size would generally be at least the best (lowest) ask
price for each holding. Moreover, without knowing the particular holdings,
the AP or arbitrageur cannot know the precise bid-ask spread for each
holding. And bid-ask spreads of course vary widely for different types of
even relatively liquid securities.

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1365

ultimately fall on the APs and those who pursue ETF

arbitrage through them,153 they will affect the extent to which
APs and these arbitrageurs perform their pricing function.154
In particular, these costs will add to the transaction costs
associated with AP trading and thus add frictions for the all-
important ETF-arbitrage mechanism. In the end, we might
therefore expect these types of nontransparent actively
managed ETF shares to have larger tracking spreads.155
Those larger tracking spreads can add risk for market
makers, thereby leading them to quote larger bid-ask spreads
for these ETFs. These heightened tracking spreads along with
any closely connected problem relating to the size of bid-ask
spreads matter even if they were to only manifest themselves
during periods of heightened market stress.156
In sum, the SEC and investment intermediaries should
keep an eye on the extent to which the types of costs examined
above will limit the robustness of ActiveShares’s arbitrage
mechanism.157 There are of course distinct types of ETF-

153 See INV. CO. INST., supra note 4, at 100 (discussing the trading of
non-AP ETF arbitrageurs).
154 See Michael C. Jensen & William H. Meckling, Theory of the Firm:
Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN.
ECON. 305, 308 (1976) (describing agency costs).
155 See Jackson Jr. & Herren Lee, supra note 79 (asserting that ETFs
hold $5 trillion worth of the American people’s savings in large part due to
the enhanced liquidity of ETFs over mutual funds, and noting that such
liquidity hinges upon the price reliance that has until now only been
assured through transparency).
156 There has been a longstanding concern for the robustness of the
ETF-arbitrage mechanism for even traditional, passive ETFs during times
of heightened market stress. See, e.g., INV. CO. INST., supra note 4 at 102
(“Over the years, policymakers have expressed concern that APs will step
away from their role in facilitating creations and redemptions of ETF shares
during periods of market stress[.]”).
157 Of course, if the types of concerns raised in this Section prove too
much for APs and ETF arbitrageurs more generally, then fund sponsors will
be hesitant to offer nontransparent ETFs in the first place and the
emergence I predict above in Section III.B will be less robust. In that
scenario, the SEC and investment intermediaries will have less work cut
out for them with respect to these products and will perhaps even be able to
steer clear of them to a good degree.

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1366 COLUMBIA BUSINESS LAW REVIEW [Vol. 2021

arbitrage mechanisms (namely, the proxy-portfolio ones

discussed in Section III.B) for the other types of
nontransparent actively managed ETFs that came to market
in mid-2020. A similar close look at their arbitrage mechanism
is outside the scope of this Article. But the ActiveShares
illustration provided in this Section gives reason to believe
that such similar innovative mechanisms developed to allow
funds and their managers to protect their secret sauce while
still fostering an effective ETF arbitrage mechanism are likely
to introduce frictions similar to the ones detailed here.

V. CONCLUSION
This Article sought to contribute to this symposium on the
future of securities law by addressing the current
development of notable features in the investment landscape.
In particular, it argued (1) that there is much reason to believe
the actively managed ETF is set to emerge as a significant
feature of that landscape, and (2) that this emergence should
trigger investor-protection work by the SEC and investment
intermediaries. In so doing, the Article took a close look at the
nontransparent actively managed ETFs that came to market
in mid-2020, with a special focus on the first such product,
ActiveShares. These actively managed ETFs, I argued,
present special concern—most notably relating to the
robustness of their ETF-arbitrage mechanisms.
Among the key questions in this area that remain are the
following. First, have market participants cracked the code for
a sufficiently robust ETF arbitrage mechanism that allows for
actively managed ETFs to trade while protecting their
managers’ secret sauce? Or have those participants, after
years of pushing, instead cracked the code for the right
Commission membership to allow them to offer such ETFs—
perhaps without a satisfactory ETF-arbitrage mechanism?
Second, and relatedly, one must wonder how regulatory
approval of new entrants in this area will proceed in the
future. Will that approval primarily turn on the political or
ideological leanings of the members that compose the
Commission, thus allowing for more new entrants in some
four-year periods but not others? Or will it eventually follow

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No. 3:1321] THE EMERGENCE OF THE ACTIVELY MANAGED ETF 1367

the new regime for ETFs more generally (which of course

currently excludes nontransparent actively managed ETFs)
and be subject to a more standardized regulatory process
governed by longer-term SEC staff members?158 And just how
far should the SEC’s current rope extend to the current
nontransparent actively managed ETFs and those who
sponsor and manage them? Lastly, to what extent is it best to
continue the market experiment with as much competition in
the space as possible under the existing regulatory framework
now that some of these products have been approved?

158 See Hu & Morley, supra note 60 (discussing the new framework for
ETF regulation following the adoption of Rule 6c-11 in late 2019.).

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