If you know you want to start a fund or ETF (want to know what time it is), do you really want to know all the issues involved in how to get that fund or ETF started (how to build a watch)?

There is an old saying that you never want to watch hot dogs, sausage or legislation being made. Just too messy and unappealing. The nuts and bolts, filings, documentation, frustrations of dealing with bureaucratic entities certainly resemble the making of sausage. The process has many moving pieces and lots of Is must be dotted and Ts crossed.

Starting a mutual fund, either an open end fund or ETF, involves much of the same process. To start either type of fund from scratch adds several key components, and much additional time. First an “investment company” must be registered.  From 1940 through the middle 1980s, the preferred form of corporate organization was a Massachusetts business trust. In the late 1980s both Maryland and Delaware saw the business opportunity of attracting the growing fund industry and tailored their laws accordingly. Nottingham’s early investment companies were Massachusetts business trusts. For the last 20 years or more we have utilized Delaware business trusts almost exclusively, for largely reasons of convenience and comfort. All three jurisdictions work well.

After the initial corporate registration, the initial filings may be made with the Securities and Exchange Commission. Immediately upon filing, a fund or ETF is registered as an investment company and may be available for investment, but only for accredited and qualified investors meeting financial qualification levels. Most funds do not open at that point, choosing to file the documents necessary to make the mutual fund or ETF available to the general public by filing for registration under the Securities Act of 1933.

Prior to filing these documents with the SEC, a board of trustees must be convened and a large number of documents and resolutions approved to outline how the fund or ETF will operate.

The documents filed include the declaration of trust, byelaws, numerous exhibits and prospectus, statement of additional information. Resolutions include everything from selection of auditors, selection of fidelity bond and e&o insurance, selection of outside counsel, and a myriad of other both mundane and critical decisions and statement of operating policy.

After a fund registration statement and filings are on record with the SEC, there is a period of waiting.  The response time is typically in the neighborhood of 60-90 days. A new fund or ETF filed as an addition to an existing series trust is supposed to receive a response in less than 75 days. A new fund in a new trust does not have any specified time period for a response.

When the SEC provides comments on the registration statement, the next step is to determine how to modify the filings to reflect the comments, or if the decision is to contest the comments, that process must be initiated. Usually the comments have good justification and are reasonable, and simply must be addressed in the best manner possible. This process can take as little as a few days, or in some cases it can take weeks or even months to determine the best response, update the documents, get the necessary approvals from the board of trustees, and prepare the document to be re-filed with the SEC.

This process can continue another one, two, three, four or more times, depending upon the quality of the responses and whether the responses themselves generate more comments and need for response. Sometimes the comments are major. Sometimes the comments are very small stylistic or semantic changes requested, but of course meaning and implication can vary quite a bit with just a few words, or a misplaced or missing comma.

Once the document is agreed upon in its form, the SEC will grant effectiveness. It is important to note that there is no such thing as an “approved” prospectus. The result is more accurately a prospectus that is deemed to provide “adequate disclosure”. Even then the legal onus is on the investment advisor, the board of trustees and all vendors to the fund to operate and market the fund in an honest, forthright, clear and non- misleading manner.

The process above is virtually the same for adding a new fund or ETF to a series trust, except that the initial filings with Delaware or other jurisdiction and the board approval of declaration of trust and all the initial organization resolutions do not have to be done but one time. Therefore a new fund or ETF in a series trust can save several weeks on the front end, a few board meetings which add significant expense, and time. A series trust new fund or ETF will receive comments in 75 days or less, whereas a de novo fund may or may not.