SEC Plans to Investigate ETFs

The Securities & Exchange Commission (SEC) announced this week that it plans to look into how exchange-traded funds (ETFs) operate, leading some to believe that new rules and enforcement actions may be on the way.

Growing increasingly prevalent as an investment vehicle, ETFs are effectively baskets of securities that continually trade on exchanges and have become a popular alternative to mutual funds.

Among other issues, the SEC will be investigating whether ETFs are complying with the exemptive relief granted by agency staff, without which they cannot legally operate. Further, the agency will inspect the process currently in place for creating and redeeming shares, as well as how ETF providers treat their customers by examining sales and trading practices, disclosures of risks and the suitability of sales, especially with respect to complex varieties known as leveraged and inverse ETFs.

It seems likely that given the stepped-up investigation by the SEC, potential rule changes and possible enforcement actions may not be far behind. One particular area that could be targeted is ETF exemptive orders. These orders lay out a number of conditions that need to be satisfied in order to be granted, but firms also make representations about how their funds will operate. It remains to be seen how the SEC will deal with funds whose procedures have evolved and do not match their initial representations.

At the end of 2015, ETFs had more than $2.13 trillion in assets under management; roughly double the amount under management just four years ago.

Contact Us Today

The attorneys at Dimond Kaplan & Rothstein, P.A. have represented investors who lost money in leveraged ETFs. If you lost money in an ETF, contact us to schedule a free consultation.


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