As someone who has spent considerable time in the ETF landscape, we feel a deep sense of gratitude for the opportunity to share insights on so-called, “ETF inside baseball.” These concepts rarely see the light of day but can significantly impact aspiring ETF entrepreneurs and ETF consumers (i.e., individuals, institutions, advisors, and so forth)). One of my teammates, Patrick Cleary, put together a great article that sheds light on the complexities and implications associated with a key decision all ETF operators need to figure out:
Do I serve as an Advisor to the ETF or the Sub-Advisor to the ETF?
A link to his article, “We want to launch an ETF. Should I be the ETF Advisor or Sub-Advisor?,” is here.
Why is this decision important, and why should you care? Well, while the title of, “Advisor,” may seem appealing and influential, it’s crucial to recognize that this position brings higher costs, greater responsibilities, and significant liability to ETF operators. Advisors must navigate a complex web of compliance requirements and operational oversight, making their role far more demanding than that of a sub-advisor, who typically operates with defined responsibilities and a more limited risk exposure.
Patrick’s article does an excellent job of clarifying the legal framework surrounding ETFs, particularly the Investment Company Act of 1940. It emphasizes that control ultimately lies with the Board of Trustees—not the Advisor. This distinction is vital for potential ETF issuers, as it underscores the fiduciary responsibilities they will need to navigate. This distinction is also significant for ETF consumers because it highlights that the ETF corporate governance structures are designed to protect shareholders and not the profit interests of the ETF issuer.
About the Author: Wesley Gray, PhD
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Important Disclosures
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.
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