PowerShares has received an exemption from the Securities and Exchange Commission [SEC] regarding Section 12d-1 of the Investment Company Act of 1940.
What does that mean? It means that mutual funds can invest large sums of money in PowerShares ETFs.
Under Section 12d-1, a mutual fund cannot own more than 3% of another fund's total voting shares. The section also restricts an ownership to 5% of total assets for a single fund, and 10% for two or more funds. With the exemption in place, a fund like Fidelity Magellan could theoretically invest all of its assets in the PowerShares Dynamic Market ETF (PWO), although that is not likely to happen.
The SEC exemption applies to all of PowerShares' existing ETFs, and any it may create in the future. The ruling is pretty standard: most major ETF providers have sought, and received a similar ruling, including Barclays Global Investors, State Street Global Advisors and Vanguard. Nonetheless, it's an important milestone for PowerShares, as it helps even the playing field between it and those other ETF giants.
ETFs have emerged as an asset allocation tool of choice for some mutual fund managers, so these exemptions can come into play. Moreover, many, many funds use ETFs to quickly equitize incoming cash flows, and with this new exemption, they can do that using PowerShares ETFs more easily.
To take advantage of the exemption, investment companies must enter into a participation agreement with PowerShares, must not exercise undue influence over PowerShares ETFs, and must comply with their own established investment policies and restrictions. Similar rules apply to other ETF providers.
In a press release, PowerShares Capital Management President Bruce Bond said,
The regulatory relief order is another step in our continued integration with INVESCO PLC, and allows PowerShares' ETFs to utilize INVESCO's global distribution capabilities - including AIM Investments in the U.S. - offering investors the best of both worlds.,PowerShares is a unit of global investment manager INVESCO PLC.