BlackRock Inc. wants to take one for the team.
The world's largest asset manager is calling for a new rule in the $3 trillion U.S. market for exchange-traded funds that would remove some of the impediments faced by wannabe issuers and potentially curtail the advantages of early movers – like BlackRock, according to Mark Wiedman, global head of the company's iShares business.
"There should be a single rule that governs plain-vanilla ETFs in the United States," Wiedman said. "There's an unlevel playing field."
A lack of ETF-specific regulation means every aspiring issuer must be approved by the Securities and Exchange Commission under an exemption to the Investment Company Act of 1940. That's left decisions about details such as the breadth of securities a fund can absorb with the SEC, which has added constraints over the two-and-a-half decades since the first ETF was sold.
And those details really matter. ETF issuers that received their approvals before 2012 are able to accept a wider variety of stocks and bonds in return for newly created ETF shares. Those who came to ETFs later are more restricted, slowing both the issuance and adoption of some types of ETFs. A bigger market for these products could mean more assets for BlackRock.
Money managers including Goldman Sachs Group Inc., which started its first ETF in 2015, and Pacific Investment Management Co. are already lobbying for more flexibility. It's particularly important for funds that hold debt, as bonds often trade less and can be harder to find, making it tough to gather a specific list of securities to switch for shares in an ETF.
The SEC has contemplated an ETF rule for more than a decade, but demands to shake up the status quo have recently grown louder.
Last year, exchange operator Bats, now part of Cboe Global Markets Inc., sent a letter to the SEC urging a streamlined rule accommodating a wide range of ETF listings. For funds that don't meet generic exchange listing requirements, "the standards of review applied by the Commission staff are not well defined and have been subject to evolution from one product to the next, often resulting in a slow, inefficient process that is both frustrating and costly to issuers and the exchanges," Bats wrote.
The letter added that the SEC is "perhaps too conservative" in considering generic listing standards for ETFs.
Now might be the right time to push for change. The SEC's division of investment management, which approves ETFs, has a new leader after David Grim stepped down last month following 22 years at the Commission. Dalia Blass, a former member of the division who left for law firm Ropes & Gray in 2016, has taken over.
Europe's ETF industry is also poised for growth thanks to a new rule, known as MiFID II, that challenges pay-to-play advisory models and makes trading more transparent. Some of the estimated $600 billion of foreign money invested in U.S. ETFs could return home as a result, upping the stakes for the American industry.
"We're hopeful that we can get on the agenda for clarification and simplification for plain-vanilla ETFs," said Wiedman. "Our biggest challenge is less about receptiveness, it's that the SEC has many things to do."