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Regulation and Compliance > Federal Regulation > SEC

SEC Chief Launches Probe of Complex ETPs

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What You Need to Know

  • Gensler asked SEC staff to also recommend potential rulemaking proposals to address risks.
  • In November 2020, the agency charged five firms with making unsuitable sales of complex ETPs to retail investors.
  • Investors should consider these risks carefully before investing in these products.

Securities and Exchange Commission Chairman Gary Gensler said Monday that he has directed agency staff to examine the potential risks of complex financial products that are listed and traded on exchanges.

“I also asked them to present recommendations for the Commission’s consideration on potential rulemaking proposals to address those risks, as part of a broader look at exchange-traded products,” Gensler said in a statement.

Some ETPs use strategies and structures that are more complex than typical stocks and bonds, Gensler warned. For instance, “leveraged ETFs” and “inverse ETFs.”

“For more than a decade, SEC staff and a number of Commissioners have been warning the public that these products, often called ‘complex ETPs,’ can pose risks to individual investors,” Gensler said.

Gensler noted the the SEC’s Office of Investor Education and Advocacy alert issued in 2009 of the risks that one type of exchange-traded fund can pose to investors who buy and hold them for longer than one day.

“In 2015, the Commission sought public comment on a broad range of issues relating to ETPs, including listing standards and broker-dealer sales practices,” he said.

In November 2020, Cetera Financial Group broker-dealer Summit Financial Networks and Advisor Group BDs Royal Alliance Associates and Securities America Advisors were among five firms the SEC charged with making unsuitable sales of complex exchange-traded products to retail investors.

All five firms settled the claims for a combined total of $3 million that will be returned to harmed investors, according to separate SEC orders.

The settled charges, Gensler said, were “against financial professionals who recommended that retail customers buy and hold ETPs designed for very short-term trading strategies.”

Former SEC Chairman Jay Clayton and several SEC Division directors expressed their concern last year that certain ETPs “’may present investor protection issues — particularly for retail investors who may not fully appreciate the particular characteristics or risks of such investments,’” Gensler stated.

The two Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw, noted Monday in a joint statement the Commission’s approval Friday of  a pair of proposed rule changes by Cboe BZX Exchange, Inc. to list and trade shares of new exchange-traded products: the 2x Long VIX Futures ETF and the -1x Short VIX Futures ETF.

“While we supported the approval of these rule changes, we want to emphasize the importance of taking steps to update the regulatory framework for these and other similar products,” Lee and Crenshaw said.

In recent years, the two commissioners continued, “our markets have seen a proliferation of novel and complex exchange-traded products. These products may be useful to certain investors who understand their unique features.  However, they can also pose significant investor protection issues and, in periods of market stress or volatility, may contribute to broader systemic risks. We believe it is time for the Commission to update the rules for these products.”

Gensler added that “though the listing and trading of these products, including the listing and trading of the two ETPs that the Commission voted to approve last Friday, can be consistent with the Exchange Act, that doesn’t mean the products are right for every investor.”

He encouraged “all investors to consider these risks carefully before investing in these products. I believe that potential rulemaking could strengthen the investor protections around these products.”


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