A Process of Natural Correction : Arbitrage and the Regulation of Exchange-Traded Funds Under the Investment Company Act

This Article seeks to distill the underlying assumptions, goals, and regulatory values that inform the history of exemptive relief under the Investment Company Act for equity index ETFs and, more recently, actively managed, transparent ETFs. The Article concludes that the common principles behind various exemptions unite to support a general theory of how regulators believe the ETF market should function. Transparency, at both the index and the portfolio level, has been the cornerstone of exemptive relief from various provisions of the Act, because it fosters an arbitrage mechanism that protects retail investors by creating price effects that ripple through the secondary market and push prices toward net asset value. Embedded within exemptions from various strictures of the Act is an implicit recognition that the natural corrective abilities of a liquid and transparent ETF market adequately protect investors from price dislocations