Monday, June 15, 2015

SEC Requests Comment on Issues Surrounding Exchange-Traded Products

By Amy Leisinger, J.D.

The SEC is seeking public comment to learn more about the listing and trading of novel and complex exchange-traded products (ETPs). Specifically, the request for comment addresses issues that arise in exemption requests for new ETPs or when an exchange establishes standards for their listing. The request for comment discusses arbitrage mechanisms and market pricing for ETPs, regulatory positions related to their trading, and potential listing standards and invites comments on the marketing of ETP products by broker-dealers and investor understanding of these products, particularly with regard to retail investors (Request for Comment on Exchange-Traded Products, Release No. 34-75165, June 12, 2015).

In a press release, SEC Chair Mary Jo White noted that “[a]s new products are developed and their complexity grows, it is critical that [the SEC] have broad public input to inform our evaluation of how they should be listed, traded, and marketed to investors, especially retail investors.”

Background. ETPs traded on national securities exchanges and through secondary markets provide investors with exposure to financial instruments, benchmarks, and strategies across a broad range of asset types. Since the Commission approved the listing and trading of shares of the first ETP in 1992, there has been significant growth in the number and variety of ETPs with a wide range of investment strategies. As of the end of 2014, there were 1,664 U.S.-listed ETPs with an aggregate market capitalization of just over $2 trillion.

Before ETP securities can be listed and traded on a national securities exchange, those securities and their issuer must comply with, or obtain exemptions from, several provisions of the securities laws. In addition, the exchange must agree to list the ETP securities for trading and have in place Commission-approved listing standards. Broker-dealers recommending buying or selling ETPs may be subject to additional scrutiny in connection with complex products and non-traditional ETPs.

Request for comment. Given the increasing scope and complexity of ETP investment strategies and related exemption requests, the SEC decided to seek public comment on topics associated with its oversight of the listing and trading of ETPs on national securities exchanges. The Commission requests views on the manner in which ETP securities are initially listed on an exchange and traded in the secondary market, as well as existing relief that has been granted to ETPs under the federal securities laws. In addition, commenters are also asked to provide information regarding how broker-dealers fulfill their obligations to investors when recommending and selling ETP products and whether they should be subject to additional requirements to provide information about the risks of investing in ETPs with complex strategies. The SEC also seeks comment with respect to arbitrage mechanisms for ETPs designed to help ensure efficient market pricing of ETP securities and keep intraday trading prices roughly equal to the value of the underlying portfolio or reference assets.

The comment period will remain open for 60 days following publication of the comment request in the Federal Register.

The release is No. 34-75165