ETF Movers & Shakers: Mary Jo White

Chair of the SEC could have a huge impact on the ETF industry.

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Editor-in-Chief
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Reviewed by: Drew Voros
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Edited by: Drew Voros

[This is part of an 11-part series we will be publishing each weekday until it is complete. The ETF Movers & Shakers feature appears in the March edition of ETF Report: Previously published: Martin Small; Luciano Siracusano; Tom Rampulla; Adam Patti; Mick McLaughlin; Mark Makepeace; Jeffrey Gundlach; Michael Crinieri; Reggie Browne; Nadig & Balchunas]

Movers and ShakersMary Jo White

The rumblings about potential regulatory reform aimed at the ETF industry have recently been growing louder. In 2015, the Securities and Exchange Commission announced that the two front-burner issues for the regulator regarding the space would be ETF bond liquidity, and leveraged and inverse ETFs.

This year, many expect the SEC will implement new rules to bring about change in those two areas that could have a meaningful and profound impact. With White leading the regulatory charge, it's a no-brainer to have her as one of the "Movers & Shakers" of the ETF industry.

"After nearly a decade of mostly apathy, the Eye of Sauron that is the SEC is now fully focused on ETFs," said Dave Nadig, director of ETFs at FactSet Research Systems. "Under Chairwoman White's watch, I expect 2016 to be a year of enormous upheaval and change for the industry—possibly the biggest since the repeal of the Glass-Steagall Act in 1999."

One key for Nadig is whether White and her colleagues will listen to the ETF industry's reaction to the SEC proposals regarding bond ETFs and geared ETFs.

"Whether that change is for the better, or is a cascade of unintended consequences rests on how thoughtfully she's reading the comment letters to recent proposed legislation," added Nadig.

The SEC had made it very clear that it wants to address bond ETF liquidity. The commission in 2015 proposed that ETFs (and mutual funds) manage the liquidity of their portfolios such that 85% of a fund consists of positions that could be liquidated within seven days without market impact. That can be a tall order for large funds, in particular the ones with relatively illiquid holdings.

The fund liquidation rule could be especially onerous in the junk bond ETF space, and some have implied that its implementation could threaten the existence of such funds.

As for "geared funds" (inverse/leveraged), the SEC appears to be more concerned about "investor protection" when it comes to the math and the daily resets of those funds that investors can have a difficult time understanding. White's regulators have also voiced concern about the use of swaps in these funds, which creates heightened counterparty risks.

Many in the industry see 3X bull or bear funds as being the main target in the SEC crosshairs, and less geared funds to be less of a focus.

"These new areas of focus are extremely important to investors and financial institutions across the spectrum," SEC Chairman Mary Jo White said in a statement earlier this year.

How White directs the SEC to actually act in these areas will be equally important to the entire ETF industry and ETF investors. Stay tuned.

Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at etf.com and ETF Report.