The Securities and Exchange Commission said Friday that it wants public feedback to help inform its review of the listing and trading of new, novel or complex exchange-traded products.

The SEC wants to hear during the 60-day comment period about the key issues that arise when exemptions are sought by a market participant to trade a new ETP or when a securities exchange seeks to establish standards for listing new ETPs.

“Exchange-traded products have become an increasingly important investment vehicle to market participants ranging from individuals to large institutional investors,” said SEC Chairwoman Mary Jo White, in a statement. “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.”

The SEC notes that the expansion of ETP investment strategies in recent years has led to a “significant increase in the number and complexity” of these requests, with the agency wanting feedback on arbitrage mechanisms and market pricing for ETPs, legal exemptions and other regulatory positions related to the trading of ETPs, and securities exchange listing standards for ETPs. 

Active equity managers have been seeking to take advantage of the ETF structure while modifying the daily transparency rules to shield their strategies from competitors. Once such “nontransparent” product is Eaton Vance’s NextShares exchange-traded managed fund structure, which was approved by the SEC in late 2014.

The SEC’s request also seeks comment on how market professionals sell ETPs, especially to retail investors, and on investors’ understanding of the nature and use of ETPs.

Ron DeLegge, founder and chief portfolio strategist at ETFGuide.com, says the SEC’s request for comment is “motivated by both volume of new ETF registrations and the complexity of these products.”

However, he notes that “if regulators are going to properly regulate, they better do more than send letters to the financial services industry asking for opinions. I doubt the SEC has adequate staffing with the necessary qualifications to keep up with an ETF industry that has seemingly zoomed past it.”

One example of how the SEC “has failed in such a simple but profound way is with how ETPs are labeled,” he continues. ”With leveraged ETFs and ETNs, there’s no clear distinction how much leverage certain funds use and over what period of time – by how these products are allowed to be named. Not only does this create investor confusion and lack of uniformity in the industry, but in my view, this is gross negligence on the part of the SEC.”

The recently released 2015 Trends in Investing Survey conducted by the Journal of Financial Planning and the FPA Research and Practice Institute found that ETFs have surpassed mutual funds in popularity, with 81% of the financial advisors surveyed stating they are currently using or recommending ETFs with their clients versus 78% who are using or recommending mutual funds.

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