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Aguilar: ETFs Need Review

SEC Commissioner Luis Aguilar urged a review of ETFs in a recent speech to the SEC’s Investor Advisory Committee, including asking whether the Commission should consider “potentially curtailing the growth of ETFs.” He noted that August’s market volatility raised questions about the “fragile” operations of ETFs and stated that “it may be time to reexamine the entire ETF ecosystem.”

Calling the area “a complex matter that is ripe for discussion,” he posed a series of questions to the Committee on a range of topics, including whether trading in ETFs should be halted when trading in a significant portion of their underlying assets are halted and whether ETFs should have their own limit up/limit down bands. Speaking to the same committee, SEC Chair Mary Jo White noted that the limit up/limit down mechanism is a pilot program that is currently undergoing analysis by Commission staff and may require amending prior to permanent approval.

Aguilar also asked whether potential uncertainty regarding whether a trade in an ETF will be determined to be clearly erroneous inhibits efficient pricing in times of volatility, and how liquidity providers could be incentivized to stay in the market in the face of extreme volatility. He also expressed concern about ETFs that invest in less liquid assets and asked if arbitrage and pricing mechanisms function effectively for those products, and whether those ETFs should use NAV-based pricing.