SEC Commissioner Kara Stein described the current exchange-traded product ("ETP") marketplace and discussed how regulators can best keep up with significant market developments.
At the Investment Company Institute 2017 Securities Law Developments Conference, Commissioner Stein explained that ETPs have become prevalent, and that the market for them has "arguably reached maturity." As a result, regulators must consider several factors, including (i) the implications of ETP prevalence for the markets as a whole, (ii) the interplay between the liquidity of ETPs and the liquidity of their underlying investments, (iii) whether market participants are appropriately focused on liquidity, and (iv) proper responses to new product ideas that offer different tradeoffs between investor protection and variety. Going forward, she said, the SEC must make sure that its regulatory approach to ETPs makes appropriate adjustments along with the changing market. To effectively accomplish this objective, she urged the SEC to analyze data and observations "to anticipate which developments support investor protection, capital formation, and fair and efficient markets – and which may not." Commissioner Stein said that this will require a nuanced approach, and advocated against grouping and evaluating disparate products under the broad ETP umbrella.
On the subject of disclosure rules, Commissioner Stein argued against a proposal that would "allow funds to provide shareholder reports via the Internet even when investors do not actually choose e-delivery." While generally supporting e-delivery, she said, the proposal has the potential to limit investor engagement. She suggested exploring a path that would preserve investor protections and choices regarding mail vs. email preferences, while reducing printing and delivery costs.
Commissioner Stein also noted the importance of fostering investor trust in the securities industry, specifically by helping investors to obtain "high-quality advice in the most cost-effective way for their particular situations." She noted the robust yet inconclusive debate over the appropriate standard of conduct for investment advisers and broker-dealers – highlighting that the question should not be whether it is better to have multiple standards of conduct, or one standard that fits all, but "whether the standard is appropriate for the conduct in which the person is engaging." Commissioner Stein concluded by advocating for a regime that does more to protect investors than merely require disclosure, which she called "just one piece of an important and complicated puzzle."
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