SEC seeks public comments on exchange-traded products
Regulator wants feedback on listing, trading and marketing of ETPs.
The Securities and Exchange Commission is seeking feedback from investors about the way it regulates an increasingly popular investment: exchange-traded products.
The agency solicited public input Friday on issues surrounding SEC approval of new, novel or complex exchange-traded vehicles. The request for comment encompasses 53 sets of questions touching on arbitrage mechanisms, market pricing, legal exemptions and listing standards.
The comment request also delved into how brokers sell ETPs to retail investors and whether investors understand what they’re buying.
Demand for ETPs, which include exchange-traded funds, pooled investments and exchange-traded notes, has spiked in recent years. From 2006-13, the number of ETPs listed and traded rose by an average of 160 annually. There were 1,664 ETPs listed on U.S. exchanges with a market value of a little more than $2 trillion at the end of 2014, according to the SEC.
Exchanged-traded products are similar to open-ended mutual funds, but they can be bought and sold throughout the trading day based on market prices rather than net asset value. The vehicles provide exposure across many asset classes to a wide range of financial instruments, benchmarks and strategies.
Financial firms have been designing complex ETPs in order to outperform the market. The products must obtain an SEC exemption under securities laws before they can be traded. Some offerings can be stuck for years waiting for a decision.
SEC Chairwoman Mary Jo White said the agency is taking a look at ETPs due to their soaring popularity and increasing risk.
“As new products are developed and their complexity grows, it is critical that we have broad public input to inform our evaluation of how they should be listed, traded and marketed to investors, especially retail investors,” Ms. White said in a statement.
The agency is zeroing in on ways brokers tout ETPs as an answer for generating higher portfolio returns.
In its comment request, the SEC asks about the effectiveness of suitability requirements for ETP sales.
“Should broker-dealers have additional responsibility to make available or provide information to investors about the risks of investing in ETPs with complex strategies prior to making a recommendation or accepting a customer order for such securities?” the SEC request states.
Comments will be due 60 days after the SEC request is published in the Federal Register.
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