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SEC Publishes Its Requests for Industry Comment Regarding Its Regulation of Exchange Traded Products

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:

  • Whether brokers are recommending certain types of ETPs as part of a buy-and-hold strategy for retail investors;
  • What are the suitability requirements for determining whether to apply an ETP investment strategy to a particular retail investor’s account and how effective are they;
  • How broker-dealers meet their sales-practice suitability obligations for ETPs;
  • Whether investors have access to sufficient information regarding ETPs;
  • What roles do exchanges have in communicating information about ETPs to their members, their members’ customers, and the general public;
  • How retail investors are introduced to ETPs by their broker-dealer;
  • Whether broker-dealer communications to retail investors regarding ETFs sufficiently disclose all material information;
  • Whether broker-dealers must provide information to retail investors regarding complex ETP investment strategies;
  • How is performance data with respect to ETPs presented to retail investors;
  • Which aspects of ETP arbitrage mechanisms material to investors are known prior to investing;
  • How are broker dealers classifying different types of ETPs;
  • Whether customers understand how an ETPs intraday indicative value is different that its net-asset value; and
  • Whether ETP investors understand how the liquidity, bid-ask spreads, and marketing prices of ETPs that hold less-liquid underlying securities affects their investment.

To date, the SEC has not proposed any new rules regarding the marketing and sales practices of ETPs.  While it is far too soon to tell, given the depth of commentary sought with respect to retail sales practices, the request for comment could potentially lead to a new rule or guidance for the industry.  The public comment period will remain open until August 17, 2015.

The attorneys at Lax & Neville LLP have successfully represented investors whose brokers and investment advisers have suggested unsuitable trading strategies focusing on ETPs.  If you have suffered damages because your broker or investment advisor invested your funds in an unsuitable ETP strategy, contact Lax & Neville LLP today at (212) 696-1999 and schedule a consultation.

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