Exchange Traded Funds

SEC Investigates Whether Currency Traders Distorted ETF and Options Prices, Manipulated Currency Markets

Published on: March 12, 2014 | by Shepherd Smith Edwards & Kantas, LLP

InvestmentNews is reporting that according to sources in the know, the Securities and Exchange Commission is trying to figure out whether currency traders at the biggest banks fixed benchmark foreign-exchange rates and distorted the process for exchange-traded funds and options. The regulator, which oversees the options and ETFs involved with the rates, joins the ongoing US and European regulatory investigations into possible currency market manipulation. Also probing the matter is the Commodity Futures Trading Commission, the Federal Reserve, the US Justice Department, New York’s lead banking regulator, and the Office of the Comptroller of the Currency.

European and US authorities have talked to at least 12 banks as they look into allegations reported by Bloomberg News last year accusing dealers of saying they shared data about client orders to manipulate currency benchmark spot rates. Options and other derivatives comprise over 50% of the $5.3 trillion/day foreign exchange market, with the remaining consisting of spot transactions.

In London today, with the Bank of England’s governor, Mark J. Carney talked to lawmakers about concerns that banking officials might have known about and tolerated currency market manipulation. Independent directors are currently conducting a review. Carney testified in front of the Treasury Select Committee.

Investment Fraud Lawsuit Against BlackRock Over Exchange-Traded Funds Could Shed More Light on Securities Lending

Published on: February 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a recent securities case, manager BlackRock is accused of self-dealing and pilfering from iShares exchange-traded funds’ securities lending revenues. The plaintiffs are pension funds Plumbers and Pipefitters Local No. 572 Pension Fund of Nashville and Laborers’ Local 265 Pension Fund of Cincinnati. They contend that a number of the iShares ETFs put money towards compensation that was “grossly excessive” to pay agents, including those with affiliations to the funds. iShares Chairman Michael Latham and BlackRock President Robert Kapito are also defendants.

The plaintiffs contend that BlackRock’s iShares ETFs violated fiduciary duties and created an fee structure was excessive in order to avail of returns from securities lending that should have been paid to investors. They believe that iShares ETFs and officials at Blackrock perpetuated a scam that allowed them to get their hands on at minimum 40% of revenues from securities lending at cost to investors.

However, BlackRock, which is the largest ETF manager, is arguing that the securities case is without merit. The company claims that its program for securities lending has generated returns that exceed the average to ETF shareholders and it believes that its lending policies shouldn’t be compared with others in its field. BlackRock has pointed out that while it has profited from the program, investors do get their high returns “over time.” It intends to fight the ETF lawsuit.

SEC’s Investment Management Division Considers Applying 1940 Advisers Act to Private Fund Advisors

Published on: December 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Division of Investment Management Director Norm Champ, consideration is being given toward how the 1940 Investment Advisers Act might be applicable to private fund advisors. Champ spoke at an American Law Institute-Continuing Legal Education Group in New York earlier this month.

One reason for this closer scrutiny is that because of the Dodd-Frank Act, advisers to certain private funds that previously didn’t have to must now register with the SEC. Currently, about 40% of SEC-registered advisors work with private funds. Hence, noted Champ, the need to view our regulatory framework from a wider perspective and “how that fits” with these advisors.

It was just recently that the division began taking a more risk-based approach toward how it determines which regulator initiatives are priority. This means that before starting a project, the way it might impact capital formation, investors, regulated entities, and the needed resources are taken into consideration. Champ said that the issue of whether/not to apply the Investment Advisers Act to private fund advisers is up for consideration as a priority. (He made clear that the remarks he made at the event are his own and don’t necessarily reflect that of his employer.)

Champ also discussed exchange-traded funds and how his division will no longer delay considering exemptive relief for ETF funds that invest a lot in derivatives. (Such requests had been placed on hold by the SEC in 2010 while it reviewed how these funds used the derivatives.)

Exchange traded funds (ETFS) are investment companies that can be legally classified as Unit Investment Trusts and open-end companies but are different from these two in that ETFs don’t sell individual shares straight to investors and instead issue shares in “Creation Units,” which are big blocks. Typically, it is institutions that buy these blocks.

That said, any relief request for ETF funds has to come with “two specific representations,” noted Champ: A) An ETF has to attest that the board will review and approve not just the derivatives investment of the funds but the way that the ETF’s investment manager handles risk related to derivatives and B) AN ETF has to represent that its derivative investments-related disclosures in periodic reports and offering documents are in line with staff and commission guidance. Champ acknowledged that there were still some concerns about leveraged ETFs and that the commission would not “support new exemptive relief” for the funds.

Leveraged ETFs, also called ultra short funds, try to deliver multiples of the performance of the benchmark or index they are tracking. They look to reach a return that is a multiple of the inverse performance of the index that is underlying.

Exchange-Traded Funds (ETFs), SEC

Investment Advisers Act of 1940 (PDF)

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Holding Brokers to Investment Adviser Accountability Standards is a Bad Idea, Say Some Wall Street Executives, Stockbroker Fraud Blog, July 16, 2011

Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds, Institutional Investor Securities Blog, December 17, 2012