Exchange traded funds: a new practice area?

With all the market uncertainty in 2011, many investors have been looking to decrease the management fees they pay for their investments products as a way to offset losses. Exchange traded funds (ETFs) are an investment product that have grown exponentially in Canada in the last year in response to this, as ETFs tend to have much lower management fees than traditional mutual funds or other investment products.

While this is not really good news for much of the mutual fund industry, some lawyers are taking advantage of this by developing a niche practice advising ETF providers.

“The change in the last year has been quite dramatic.  Prior to 2011, there were only 4 ETF providers in Canada.  There are now 8, and I expect that the number will increase again in 2012,” says Carol Derk, a partner at Borden Ladner Gervais LLP. Derk says that approximately 50 to 60 per cent of her work has been related to ETFs and she expects that this will grow. So far, though, she thinks fewer than 10 partners and associates in Canada do a lot of work in this area.

“Although the number of players so far is not that many it is growing and more entrants are expected, particularly if they can find a niche which differentiates them from the competition,” says Garth Foster, a partner with Fasken Martineau who also does ETF work as a substantial part of his practice.

Andrew Aziz, who does a lot of ETF work at Osler, Hoskin & Harcourt LLP, says from a legal standpoint, ETFs are really a hybrid.

“While they are subject to our conventional mutual fund rule, National Instrument 81-102, they are listed products like closed end funds and so use the long form prospectus form instead of the simplified prospectus form that a mutual fund would use,” says Aziz. “So they are like listed funds but with some of the regulatory framework of a conventional mutual fund. Plus the TSX rules come into play because of the listing and ETFs distribute their units through designated brokers and underwriters who are investment dealers. They generally subscribe and pay for units with portfolio securities so as to reduce transaction costs to the ETF. They then sell the units to people who want to buy them over the TSX.”

ETFs started as product that tracked major indexes, like a major S&P/TSX index, but as the number of ETFs grow, they have become increasingly niche and complex. Which is likely good news for lawyers in this area.

Tim Wilbur

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