Compliance with fund of funds regulations requires watchful eye (IGNITES)

A prior SEC case against a large mutual fund sponsor shows the complexities of complying with regulations limiting funds’ investments in ETFs. Traditionally, the SEC has required fund companies to have a robust pre-trade compliance process to ensure compliance with rules on investments in other funds. According to FrontLine’s Founder and President Amy Lynch, it appears that SEC allegations against Franklin Templeton, stemming from 2015, show missteps in tracking the amount of shares purchased in ETFs. Ms. Lynch states that trade monitoring systems need to first, properly categorize ETFs as mutual fund investments, then flag instances where share ownership will exceed limits imposed by regulations, normally limited to 3 percent of the outstanding shares of another fund. While certain exemptive relief exists, it was not pursued by Franklin Templeton until after the SEC identified the violation. See IGNITES (subscription required), “Franklin’s Fine Shows Pitfalls of Funds Investing in ETFs“