Fund Democracy

Fund Democracy Advocacy Initiatives

Diamonds, SPDRS, WEBS: Request for a Hearing on Exemptive Application (May 4, 2000)

HEARING REQUEST AND RELATED DOCUMENTS

Diamonds, SPDRS and iShares are mutual funds, but only technically. Unlike mutual funds, they generally don't give you the right to redeem your shares for your pro rata share of the fund's net asset value (NAV). Prices are set by the market, and they can be substantially higher or lower than the fund's NAV.

These funds have been widely portrayed, however, as trading at net asset value, a misimpression that has been reinforced by the limited availability of information about their NAVs, market prices and differences between the two.  Fund Democracy asked the SEC to hold a hearing on Barclays Global Advisors' request to offer 59 new iShares to determine whether additional measures were needed to fully inform investors about the risk that these funds will trade above or below their NAVs. The Consumer Federation of America joined in this request.

To address our concerns, Barclays promised to provide daily net asset values, market prices, and discounts/premiums, as well as charts showing historical discounts/premiums, on its web site and in the funds’ prospectuses and annual reports.  Fund Democracy and the CFA withdrew their hearing requests.  The SEC issued an order granting the exemption on May 12, 2000.

Exchange-traded funds that have previously obtained exemptions from the SEC technically will not be subject to the conditions to which Barclays has agreed.  These funds include iShares MSCI Index Funds (formerly known as WEBS), which have frequently traded at substantial and persistent discounts/premiums.  The SEC has not indicated how it will resolve the difference in the disclosure standards being applied to these funds.

Vanguard recently was granted an exemption for its own family exchange-traded funds, and agreed to disclosure conditions similar to those to which Barclays agreed. Taking a page from Fund Democracy's book, Standard & Poors asked the SEC to hold a hearing on Vanguard's request. The SEC summarily rejected S&P's request. For a discussion of the S&P request and SEC response, see:
  • S&P Asks SEC to Block New Vanguard Viper Fund, TheStreet.com (Nov. 1, 2000) (article abstract)
  • SEC Rejects S&P Move to Stall Vanguard's Vipers, TheStreet.com (Dec. 14, 2000) (article abstract)

For press accounts related to Fund Democracy's and the CFA's hearing requests, see: Aaron Lucchetti, Barclays's New Funds Attract $800 Million, Wall Street Journal (May 23, 2000); Revelations, Financial Planning Interactive (May 16, 2000); Frank Stanton, Barclays Set to Launch More Exchange-Traded Funds, Morningstar (May 15, 2000); Cal Mankowski, Exchange-Traded Funds Get Scrutiny as Popularity Grows, Reuters (May 15, 2000); Lee Barney & Mike Garrity, Tactic Could Compel Greater Fund Disclosure, Mutual Fund Market News (May 15, 2000); Ken Schachter, Barclays Dodges a Bullet on its ETF Rollout, Ignites.com (May 15, 2000); Aaron Lucchetti, Barclays Fund Product Draws Scrutiny of Consumer Group, Wall Street Journal (May 5, 2000): Karen Damato & Aaron Lucchetti, Critics Worry About Risks of Exchange-Traded Funds, Wall Street Journal (July 7, 2000); Albert Crenshaw, Funds that Trade like Stocks, Washington Post (July 9,2000).

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