How ETFs Pass Muster

The explosive growth of exchange-traded funds -- there are now more than 200 U.S.-based ETFs holding more than $300 billion in assets -- not only has fund families feverishly churning out new products, it also has regulators working overtime to approve them.

With so much at stake, what does the Securities and Exchange Commission look for before greenlighting an ETF?

Like the Food and Drug Administration approving a new drug, the SEC's top priority is to make sure the new ETF is safe for public consumption, according to attorneys Patrick Daugherty and George Simon.

The pair are well-qualified to comment, because they used to work at the SEC before switching to the private law firm of Foley & Lardner. At the firm, they represent ETF providers seeking to get their funds blessed by the SEC and onto an exchange. The pair were instrumental in the introduction of the Rydex Euro Currency Trust (FXE Quote), the first ETF to track a currency, as well as State Street's streetTracks Gold Trust(GLD Quote), which now boasts more than $6 billion in assets.

In a conversation with TheStreet.com, Daugherty and Simon discussed the difficulties in getting an ETF approved by the SEC, the problem affecting an oil ETF and what's holding up the proposed silver ETF.

TheStreet.com: How difficult is it to bring a new ETF to market?

George Simon: It's a multipronged problem because there are multiple divisions at the SEC that must approve a new financial product, and each has its own set of concerns. The reason we got in this business is because the gold ETF had stalled. They could not get it through the market regulation division, which approves the exchange rules that permit ETFs to trade.

What do you mean when you say, 'they could not get it through'?

Simon: When you list one of these products on an exchange, the exchange has to file rules enabling that to happen. And the SEC has to approve those rules. The SEC, especially the market regulation division, wants to discern whether or not an ETF is a suitable product to trade on an exchange. And the gold ETF raised some real questions because gold is an over-the-counter, loose market.