A top member of a U.S. securities regulator on Monday called for a more transparent and rigorous review process before approving rule changes to list riskier exchange-traded funds that she believes could harm retail investors.
Securities and Exchange Commission Democratic member Kara Stein called for the reforms as part of a three-page dissent over a rule change that paved the way for seven new exchange-traded funds from AccuShares Investment Management LLC to list on the Nasdaq stock market exchange.
The ETFs use so-called "Paired Class Shares" to issue and redeem shares of opposing share classes that move in opposite directions, known as "Up Shares" and "Down Shares."
Among the ETFs named are an industrial metals spot fund, a crude oil spot fund, and a natural gas spot fund.
The commission approved the rule change last week, with members noting that the exchange's proposal to list and trade the funds is consistent with the Securities Exchange Act of 1934 and the rules and regulations applicable to a national securities exchange. The adoption of new listing standards specific to the Paired Class Shares is necessary before the AccuShares funds can start trading.
At the heart of Stein's concern is the complexity of the funds, which would require investors to be extra vigilant in monitoring their investments, and the potential harm to investors who may not fully understand how the funds operate.
But her concerns about the approval of new listing standards, which will enable the funds to trade, extend beyond the AccuShares decision alone and call for a more thorough review process for other similarly risky and complex products.
"We need a more thoughtful, transparent, and fulsome review process for these types of ETFs, even if it means disapproving proposed rules changes until we get comfortable," with such products, Stein wrote in the statement dated Monday.
She noted that a more rigorous review process is especially necessary because making a rule change clears the path for other "copycat" products to enter the market.
Stein also called for gathering more public input during the review process to better take into account broader market and systemic impacts of new ETFs.
"The Commission should be taking more affirmative steps to obtain public comment and academic analysis in this space," she wrote.