June 30, 2016
While not objecting to the general proposal to dispense with individual filings for Managed Fund Shares (MFS) to be replaced by generic standards for such a class of marketable and tradeable products, certain caveats must be entered and addressed.The basis for having a set of generic standards assumes the existence of monitoring by the exchange of the activities and conformance with the proposed standards by the MFS originating institutions. There must be actual determination of compliance with the generic standards to assure investor protection. For example, will these new generic standards apply to existing MFS which have already be brought into existence, or will different standard apply to previously issues MFS which may have been filed individually.
More generally, as part of the Exchange's monitoring program, there should be continued affirmation by the originators of MFS on a periodic basis that they are in compliance compliance with the standards. That is, an annual report should be provided to the exchange perhaps within 60 days of the conclusion of a calendar year that the MFS has been in compliance with the standards, or if any deviations from the standards have occurred, those should be reported. For example if a security held within the MFS portfolio has dropped below the minimum qualifying capitalization, those deviations from application of the size criteria should be reported, for both US and non-US securities. Likewise, if the MFS has deviated from its stated objectives, either because of a change in the objectives, or the occurrence of other than normal market conditions, the MFS issuer should report such deviations from objectives to the Exchange as part of its monitoring programs.
For example, if one, or a group of MFS issued by one party report a deviation from normal market conditions, while many or most other MFS securities do not or have not reported a deviation from normal market conditions, justifying a change in investment strategy, objective, or compliance, it would be worth examining the behavior of parties seeking to justify an other than widespread claimed deviation in market conditions.
Having a report from MFS issuers on compliance and deviations from compliance would seem to be a reasonable method of assuring that the generic standards have actual teeth to permit the class of MFS securities to be traded without individual approval. Because MFS are typically based on a higher fee structure, perhaps of .25-.49% rather than .1-.2%, permitting greater earnings for issuers, having reasonable reporting standards for issuers is not unreasonable, compared to index ETFS which have lower expenses for investors.