SEC’s Stein Wants Regulator to Take a Closer Look at Exchange-Traded Funds and Alternative Mutual Funds

Kara Stein, an SEC commissioner, is calling on the Securities and Exchange Commission to examine whether exchange-traded funds and alternative funds are managing to get around certain rules and placing investors at risk. Stein said that both types of funds, which use high-risk complex investment strategies or place their money in illiquid assets, frequently “operate in a gray area” when it comes to regulation.

During a speech at the Brookings Institution, the SEC Commissioner noted that alternative mutual funds, which act like hedge funds and are often called liquid alts, don’t have to abide by the Investment Company Act of 1940 rules regarding leverage and liquidity. Stein said that the promise of benefits like those that come with investing in hedge funds along with liquidity of more traditional mutual funds are part of why alternative mutual funds appeal to investors. However, alternative mutual funds don’t necessarily provide the protections that accompany their more traditional counterparts.

Now, Stein is suggesting that the SEC propose rules regarding liquidity and the use of derivatives in alternative mutual funds. She said that the industry and regulators should ensure that retail investors continue to receive protections.

Earlier this month, the SEC announced that it is open for feedback from the public to help determine how to best review the listing and trading of unusual, new, or complex exchange-traded products. Because investment strategies of ETPs have expanded in recent years, there has been a growth in the amount of new ETPs and kinds of complexities. Meantime, individual and institutional investors continue to seek out these types of products.

SEC Chair Mary Jo White noted that with the increase in new, more complex products, the public’s input has become very necessary. The solicitation for comments tackles market pricing, arbitrage mechanisms, and other regulatory positions involving ETP trading and standards for ETP security exchange listings.

Exchange Traded Products are open-ended investments found on the exchange. These are passive, open-ended investments that will frequently trade at or near to net asset value. Exchange-Traded Funds, Exchange Traded Commodities, and Exchanged Traded Notes fall under the ETP umbrella.

If you suspect your investments are due to a financial representative’s negligence or wrongdoing, contact our exchange-traded product fraud lawyers today.

Stein’s Speech at the Brooking Institution, SEC, June 15, 2015

Investment Company Act of 1940 (PDF)

The SEC’s Request for Comment on Exchange-Traded Products (PDF)

Are Alternative Investments Good for Investors?, Stockbroker Fraud Blog, October 30, 2013