This is a vexed subject on which even the SEC Commissioners stand divided.
The SEC is proposing to regulate certain financial products and impose additional sales-practice rules between broker-dealers and investment advisors and their clients. Specifically, the SEC re-proposed rule 18f-4 under the Investment Company Act of 1940, proposed new rule 15l-2 under the Securities Exchange Act of 1934, and new rule 211(h)-1 under the Investment Advisers Act of 1940. (Competitive Enterprise Institute)
The SEC’s proposed regulations have triggered widespread opposition, particularly those relating to leveraged (geared) ETFs.
The public has until March 24, 2020, to submit its comments on the proposals.
The groundswell of opinion against the new rules
- The rules go against Trump’s stance in favor of deregulation.
- Leveraged ETFs are useful for investors to hedge risk or take on specific risks
- These ETFs are low-cost, transparent and well-regulated
- The due diligence required to be conducted by brokers and advisers is unduly exhaustive
- The “overly paternalistic approach” of the SEC would only raise the cost of these ETFs for investors
- Besides, likely, brokers and advisers will simply stop dealing in these ETFs to avoid the complicated due diligence
- There is no evidence that these ETFs, which have been in existence for over a quarter-century, have harmed investors
- Far from it, leveraged ETFs were among the top-performing funds for the last decade
- Small, non-institutional investors have a right to a full range of investment products to pick from, including leveraged ETFs.
COMPETITIVE ENTERPRISE INSTITUTE
- The regulations would bar many middle-class investors from buying these mutual funds and exchange-traded funds
- The proposed rules would cost the industry a massive $2.4 billion and another $450 million annually, according to the SEC Division of Economic and Risk Analysis.
- Brokers-dealers and advisers will simply pass on these costs to investors
- Clayton has proposed the regulations over the objections of the SEC’s two other Republican commissioners appointed by President Trump
- Investors would be unable to buy a host of funds they can now purchase for zero-dollar commissions from discount brokerages and investing apps such as Robinhood.
- The regulations militate against financial inclusion and access to wealth-building
- The risks are fully disclosed to investors per SEC rules
- These rules represent a very intrusive, burdensome, expansive and expensive “solution” to a poorly defined and potentially non-existent “problem”
- The rules would also require funds to institute a specified derivatives risk management program that would have to include stress testing, backtesting, internal reporting and escalation, and program review elements
- The costs of the proposed rule are very high and defined. The benefits of the rule are unclear and potentially non-existent. The rule, therefore, should be withdrawn on grounds that the costs exceed the benefits.
- Whether Regulation BI has addressed the perceived problem regarding retail investors’ investment in leveraged or inverse funds before promulgating yet another expensive and intrusive rule that is more likely to harm investors than to protect them.
- Curious timing, considering leveraged and inverse ETFs have existed for more than 15 years.
- Ben Johnson, head of ETF research at Morningstar: “I liken the SEC’s proposal to going to shut the barn door after the horse has bolted only to find that someone else has already shut the door. After widespread misuse of these funds years ago, most brokerages and platforms have either disallowed these funds outright or made them otherwise more difficult to access.”
- Further comments by Johnson: “These products seem to have found their natural audience and reached saturation; however, “the measures the SEC is proposing would put them even further out of reach.”
- Todd Rosenbluth, head of ETF and mutual fund research at CFRA: “It’s going to make it a step or two harder for people to buy these ETFs; but the type of investor that these products appeal to, which are highly tactical and short term in nature, should be comfortable saying yes to a questionnaire.”
Private Vs. Public Markets
Commissioners Hester M Peirce and Elad L Roisman
- “We disagree with this blunt, overly-paternalistic approach to investor protection. The SEC protects investors not by limiting their right to access products available in public markets, but by ensuring that they have material information at the ready to make informed buy, sell, and hold decisions.”
- [In the context of Regulation Best Interest] “The Commission now proposes a requirement that would micromanage broker-dealers and advisers, and do so in a way that appears neither necessary nor sufficient for them to meet their existing regulatory obligations.”
- Are we introducing the concept of ‘accredited investor’ (as prevalent in private markets) in the public markets? “To our knowledge, the Commission has not established a similar hurdle for investors attempting to buy or sell securities available in our public markets. Why would we introduce such a thing now, with respect to such a narrow subset of products?”
- ProShares CEO Michael Sapir: It’s a dangerous precedent for the SEC to require qualification for investors in public securities. Only private investments typically require that investors be qualified. Therefore there is an irony in the SEC’s proposals. Now there might be “more access to markets where less disclosure and regulation [exist]…and less access to markets where there are more disclosure and regulation.”
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