SEC Pushes New ETF Rules Despite Industry’s Howls

March 09, 2017

New York (Reuters) – U.S. regulators are advancing rules this week to tighten standards on the ballooning exchange-traded fund industry over the objections of asset managers including BlackRock and Invesco.

The U.S. Securities and Exchange Commission last year pushed the three main ETF trading venues to draft rules that explicitly require the funds to continually pass a number of tests or face the possibility of being shut down, according to three people with knowledge of the matter and the regulator's filings.

The regulator approved the second of the three proposals in a notice posted on Wednesday and could rule on the third in coming days.

The latest regulatory actions highlight concerns over the potential for trading abuses affecting ETFs, especially those tracking indexes that include assets not traded often.

Rules Could Shutter Some ETFs

ETF managers including BlackRock and Invesco have sent letters to the SEC arguing that the rules are unnecessary and could force some ETFs to be declared out of compliance or shut down even if the fund itself is not at risk.

ETFs have remained one of the fastest-growing parts of the market despite concerns over their durability during periods of market stress; for instance, after a "flash crash" that pummeled some ETFs on Aug. 24, 2015.

ETFs will be required to meet requirements detailed in 314 pages of exchange filings unless they are granted an exception. For instance, a stock index fund needs to track a benchmark with a minimum number of equities that meet a target market value and trading volume.

Current Listing Standards ‘Problematic’ & ‘Outdated’

"There is a lot of concern about manipulation," said James Simpson, president of ETP Resources LLC, a consulting and data company, and a former American Stock Exchange official, who said the listing standards for ETFs are "problematic" and "outdated."

The SEC backs the rules on the belief they could prevent market rigging; for instance, if an ETF tracks a group of rarely traded stocks whose prices could easily be manipulated, according to a person familiar with the SEC's reasoning and the agency's disclosures on the topic.


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