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The fast-growing world of exchange-traded funds came under close scrutiny on Oct. 19 at a Senate Banking, Housing, and Urban Affairs subcommittee hearing chaired by Jack Reed (D-RI).
Noel Archard, a managing director at the world’s biggest ETF firm, iShares, and Harold Bradley, chief investment officer at the nonprofit Kauffman Foundation, were among those testifying at the U.S. Senate Banking subcommittee hearing, “Market Microstructure: Examination of Exchange-Traded Funds (ETFs).”
Archard and the other two panelists—the Nasdaq exchange’s Eric Noll, and Eileen Rominger, the director of the Securities and Exchange Commission’s Investment Management division—generally agreed that ETFs aren’t to blame for all the volatility in the markets in the past few months. However, the Kauffman Foundation’s Bradley, co-author of two recent research reports taking a critical view of ETFs, argued that ETFs represent a risk to the functioning of modern equity markets and called for a broad SEC inquiry into their impact on markets, suggesting that ETFs are “dangerous.”
It was clear the other panelists didn’t share Bradley’s concern—or at least the extent of it. While calling for greater disclosure and transparency, they emphasized that ETFs are among the most cost-efficient and tax-efficient investment vehicles.
The SEC’s Rominger, for example, said that while the commission remains committed to ensuring investors are properly protected, its inquiries so far haven’t led the SEC to the conclusion that ETFs are roiling the markets.
Noll, who is in charge of transaction services at Nasdaq, was plain in noting that all the recent volatility has a lot more to do with real uncertainty than with ETFs.
There was more of a consensus between Bradley and the other panelists on the need for regulation of the relatively small piece of the ETP market that involves leveraged and inverse ETFs.
All the panelists seemed to agree that there’s a need to protect the interest of investors who might not understand ETFs, especially those using derivatives to execute their investment strategies.
Archard from iShares testified that leveraged and inverse ETPs should not even be labeled ETFs, and he advocated a new regulatory standard that establishes clear guidelines for delineating derivatives such as leveraged ETFs from plain-vanilla ones.
Archard also called for regulations that require disclosures of any costs or fees that might affect investors’ holdings and returns.
Bradley, meanwhile, specifically called for much more stringent regulation for market makers, arguing they were exempt from too many rules.
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2012
