On June 12, 2015, the Securities and Exchange Commission (“SEC”) solicited public comment on its approval and regulation of exchange traded products (“ETPs”). ETPs are similar to open-ended mutual funds, but can be bought and sold throughout the day at market prices, rather than net-asset value. ETPs include, but are not limited to, exchange-traded funds, pooled investments, and exchange-traded notes. The SEC’s request for comment asked fifty-three (53) sets of questions touching on subjects such as arbitrage mechanisms, pricing, listing standards, legal exemptions, suitability requirements, and broker-dealer marketing and sales practices with respect to ETPs among other subjects.
According to the SEC, the number of ETPs available to retail customers rose dramatically from 2006-2013. As of 2014, the SEC estimates there are approximately 1,664 ETPs listed on U.S. exchanges, with a market value surpassing $2 trillion. Some financial firms design complex ETPs and market them to retail clients in an effort to outperform the market. In a press release accompanying the SEC’s request for industry comment, SEC Chairwoman Mary Jo White stated, “[a]s 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.”
In line with the SEC’s concern for retail investors, the SEC solicited industry comment regarding broker-dealer sales practices and investors’ understanding and use of ETPs that generally focused on: