SEC to Consider New Rules for Leveraged and Inverse ETFs: Gensler
Securities and Exchange Commission Chair Gary Gensler has asked his staff to review the potential risks complex exchange-traded products pose to retail customers as well as “system-wide” consequences for financial markets, according to a statement issued late Monday.
As part of the review, the Commission would also consider potential rule proposals to address the products’ risks, according to Gensler, who specifically highlighted leveraged and inverse exchange-traded funds, which have been a long-running focus at the agency.
Gensler’s predecessor, Jay Clayton, last year had raised the concern that some ETPs “may present investor protection issues — particularly for retail investors who may not fully appreciate the particular characteristics or risks of such investments.”
The statement from Gensler noted that ETPs can also pose risks “even to sophisticated investors, and can potentially create system-wide risks by operating in unanticipated ways when markets experience volatility or stress conditions.”
“I believe that potential rulemaking could strengthen the investor protections around these products,” Gensler wrote.
The statement also highlighted recent settlements in which the SEC had taken action against “financial professionals” for improperly recommending that customers buy and hold ETPs, which are typically designed for only short-term trading.
In July, the SEC reached an $8 million settlement with UBS Wealth Management USA over its sales of complex ETPs that was part of an ETP enforcement initiative launched under Clayton.
In November, the Commission obtained a $3 million-plus settlement with American Portfolios Financial Services, Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. over similar allegations.
Gensler’s statement on Monday comes after the SEC on Friday granted approvals to the Cboe BZX Exchange, Inc. to list and trade two new leveraged ETFs, including a 2x Long VIX Futures ETF and a -1x Short VIX Futures ETF.
Two SEC commissioners, Allison Herren Lee and Caroline A. Crenshaw, in a separate statement following the approvals also noted that the agency needed to update the regulatory framework including a ”tailored sales practices framework that applies to the recommendation and trading of complex exchange-traded products.”
“Many exchange-traded products have features that may make it difficult for investors—and even financial professionals—to understand their characteristics and risks,” Lee and Crenshaw wrote. “We are overdue for a comprehensive and consistent approach to the review of complex exchange-traded products and the sales practices issues that they present.”