SEC zeroes in on ETF risks and mutual fund charges

The agency is scrutinizing ETFs because of instances of sharp volatility, and has launched an initiative to evaluate how mutual funds can better inform investors about costs.

The Securities and Exchange Commission is considering enhanced regulation of exchange-traded funds, including assessing how they’re sold to investors, and is looking into whether mutual funds can improve transparency of fees and expenses, chairwoman Mary Jo White said Friday.
The agency is scrutinizing ETFs because of their role in the 2010 market “flash crash” and another moment of sharp volatility on Aug. 24, 2015. It is looking at the relationship between ETF share prices and portfolio holdings and its impact on investors.
In addition, the agency is assessing investor protection related to ETFs, which grew from $408 billion in assets in 2006 to $2 trillion last year.
Staff “is considering the sales practices of broker-dealers in the market and how investors understand and use ETFs, particularly as the product landscape continues to diversify,” Ms. White said in a speech at an Investment Company Institute conference.
Ms. White did not elaborate on the agency’s plan for strengthening ETF regulation.
“I don’t want to comment specifically because I don’t want to get ahead of our work and our thinking on it,” Ms. White told reporters after her speech.
She declined to characterize ETFs as more-risky than other investment products.
“What we have to do with any product is look at the risks they create, and regulate appropriately, whether that be by disclosure or other measures,” she said.
The agency also has launched a “disclosure effectiveness” initiative to evaluate how mutual funds can better inform investors about costs and risks associated with the products and other factors that affect their performance.
For instance, SEC staff will consider whether improvements can be made to fee tables included in a fund prospectus to “facilitate investor comprehension of the information it presents,” Ms. White said in her speech.
The SEC will help funds improve the quality of their disclosures, Ms. White said, but it is up to fund managers to avoid boilerplate language and tailor them for each fund.
“While the SEC regulates investment companies, you, as asset management executives, are the standard bearers for your industry and must foster a culture in your organizations that prioritizes responsibility and fairness and asks first — and last — what is in the best interest of investors,” Ms. White said in her speech.
The SEC is working on rules designed to improve mutual fund liquidity and reform the use of derivatives in funds. The separate staff initiative on fee transparency follows a similar recommendation by the SEC Investor Advisory Committee last month.
On another regulatory initiative, Ms. White did not project when a rule for third-party exams of investment advisers might be proposed. It has a deadline of next April on the latest SEC regulatory agenda.
“The staff, at my direction, is working toward and really has made a tremendous amount of progress on a recommendation to the commission” on the matter, Ms. White told reporters.