Gensler, Commissioners Eye Exchange-Traded Products for Investor Risks

SEC Chairman Gary Gensler said he has tasked SEC staff to study potential risks of complex financial products that are listed and traded on exchanges and to present recommendations for the consideration on potential rulemaking proposals to address those risks, as part of a broader look at exchange-traded products. Commissioners Caroline Crenshaw and Allison Herren Lee echoed Gensler’s concerns in a statement, noting the “proliferation of novel and complex exchange-traded products” in recent years. The Commissioners stated that these products can pose significant investor protection issues and, in periods of market stress or volatility, may contribute to broader systemic risks. Crenshaw and Lee proposed principles that should apply to an updated regulatory framework for these exchange-traded products, calling for strong, consistent regulatory oversight whether ETPs are registered under the 1940 Act or the Securities Act of 1933. The principles also included providing heightened protections with regard to investors’ trading of complex ETPs and adopting and implementing a tailored sales practices framework that applies to the recommendation and trading of these products commensurate with their risks.  The SEC had previously considered, but ultimately failed to adopt, tailored sales practices requirements for leveraged and inverse investment companies that would have added protections for investors in self-directed accounts, and the Commissioners called for that effort to be renewed and expanded beyond 1940 Act-registered products.