SEC Commissioner Kara Stein worried in a recent speech that increasing complexity of ETFs “makes understanding such products difficult for the average investor.” Stein highlighted the strong growth in both the overall assets under management in ETFs and in the number of unique strategies offered. She noted that some of these products can be described as “exotic or innovative,” but others have been called “toxic.” Stein suggested that “[t]he attempt to fit such non-equity products into the rules designed for traditional equity securities has left potential gaps in investor protection and also raised questions about market integrity.”
Stein argued that “even plain-vanilla, equity index ETFs may present risks that are not always anticipated or fully understood, as evidenced by the events of August 24, 2015.” As the Commission staff and market participants work to evaluate what happened, Stein cited the “need to take a holistic look at these products, their transparency, and how they interact in our capital markets.” According to Stein, this review should encompass the role of authorized participants and market makers, the SEC and FINRA’s resources for reviewing ETF offerings and marketing, and potential “holistic regulation” for ETFs and ETPs. Stein concluded her remarks by noting that “[w]e are at our best when we look back and learn, then look forward and act in a balanced and thoughtful manner to accomplish smart and effective outcomes.