The growing world of exchange-traded funds is coming under increasing scrutiny of U.S. authorities, and some changes are expected in Europe in the next few months.
But, sweeping changes are not on the horizon.
In October, a top official of the Securities and Exchange Commission disclosed the agency was conducting a broad review of ETFs.
“Commission staff is currently engaged in a general review of exchange-traded products in connection with, among others, the adequacy of investor disclosure, liquidity levels and transparency of underlying instruments in which ETPs invest, fair valuations, efficiency in the arbitrage process and the relationship between market volatility and ETPs,” said Eileen Rominger, director of the SEC's Division of Investment Management.
Her comments were included in prepared testimony to a U.S. Senate Banking subcommittee hearing.
It wasn't the first time the SEC said it was looking at ETFs.
In March 2010, the agency announced it had suspended approval of ETFs that used derivatives — such as leveraged ETFs or actively managed ETFs that use futures, options or swaps — while it examined the use of derivatives in exchange-traded products.
The review, which also extends to the use of derivatives in other investment products, is continuing, and applications for new leveraged and/or active ETFs that use derivatives have not been approved.
“Based on recent testimony and comments from the SEC staff, it appears that the staff is revisiting a wide range of fundamental ETF issues,” said Michael Mundt, a partner at law firm Stradley, Ronon, Stevens & Young LLP in Washington. “I would expect this review to delay consideration of new types of ETFs for the immediate future.”
Mr. Mundt is a former assistant director in the Division of Investment Management at the SEC, where he supervised the review of applications to introduce ETFs.
Several sources familiar with how the agency operates who asked not to be identified agreed, saying the latest ETF review is so broad it's unlikely to result in any new regulations in the next year.
SEC spokeswoman Florence Herman said the agency would have no comment on the SEC reviews of derivatives and ETFs.