'Extremely Aggressive' SEC Poses Headwinds for ETF Industry

The Securities and Exchange Commission’s hefty regulatory agenda may take a toll on the exchange-traded fund industry, as proposed rules regarding ESG disclosures and the barring of a spot bitcoin ETF linger.  

The regulatory agency has developed a variety of rules since Chairman Gary Gensler was confirmed in 2021. The proposals have received mixed reviews from investors and big ETF issuers, who claim that the possible regulatory provisions would increase confusion and costs.  

For some experts, these rule proposals have made for an increasingly aggressive Wall Street watchdog, whose actions, even if not directly related to the $7 trillion ETF industry, would pose headwinds for funds and their providers.  

“We have an extremely aggressive and strong-minded SEC,” said Jeremy Senderowicz of Vedder Price in a panel appearance on regulation at the Exchange conference in Miami Beach, Florida. “They view themselves as having a very wide- and far-reaching regulatory agenda.” 

There is a “much more adversarial relationship between the SEC and the fund industry” than what has existed in many years, he said. Although many of their proposals are not “expressly targeted” at issuers they could impact the entire industry. “The ETF industry is going to be heavily affected by a whole slew of these initiatives,” Senderowicz said. 

Among the industry’s biggest woes could be the SEC’s haphazard proposal and implementation of proposed rules. According to Steve Feinour, partner at Stradley Ronon Stevens & Young, two of the proposed rules that could pose problems for ETFs include disclosures related to index providers and ESG funds.  

“I always ask myself, ‘What is the problem that we're solving for here?’” Feinour said during the panel. “And I think for a lot of this rulemaking, there are legitimate questions as to whether there are real problems to solve for and even if there is a potential problem.”  

The SEC issued a request for comment in June to gauge the need to impose tougher standards on providers such as S&P Global, MSCI and FTSE Russell, who provide underlying indexes for many ETFs. According to Feinour, the request appears to be a “land grab” from the SEC, which usually does not see index providers as part of its jurisdiction.  

In May, the SEC issued two proposals that would require more disclosures from funds and companies claiming to invest in companies that adhere to ESG factors. Hundreds of citizens, academics, financial advisors and asset managers shared their opinions during the open comment period. A final version of the rules is expected later this year.  

“[You’re seeing] regulators acting as merit regulators, where they're picking and choosing what they think is appropriate for investors and not giving investors autonomy,” Feinour said. “They're making you know gatekeeper-type decisions about what they think is right for investors and what is not.” 

Another raging battle is a spot bitcoin ETF. The SEC has routinely denied issuers the ability to bring a spot product to the market, with the latest loss being doled out to Ark 21Shares Spot bitcoin ETF on Jan. 26. Issuers have largely fought back, with Grayscale Investments launching a lawsuit against the regulatory agency after its denial of the firm’s $14.6 billion Grayscale Bitcoin Trust (GBTC) conversion to an ETF.  

A final decision on Grayscale’s suit is expected in fall of 2023. 

Contact Shubham Saharan at [email protected]