The rise of complex mutual and exchange-traded funds has exposed weaknesses in the outdated regulatory regime for the investments and could be putting retail investors at risk, a top U.S. regulator said Monday.

"I am concerned that we are starting to see some cracks in the foundation," Securities and Exchange Commission Democratic member Kara Stein said at a Brookings Institution event.

At issue, she said, are mutual funds and exchange-traded products that utilize large amounts of leverage, invest in illiquid securities or execute strategies similar to those used by hedge funds.

Although there are rules on the books to limit these activities, Stein said she is concerned too many funds have been able to avoid some of these restrictions, in some cases by relying on exemptions granted by SEC staff.

Stein's comments come at a time when the SEC and other federal regulators have been more closely scrutinizing the asset management sector amid questions about whether certain products or activities could pose risks.

SEC Chair Mary Jo White late last year outlined a series of reforms she plans to enact, including requiring mutual funds and advisers to report additional data, imposing new risk controls on mutual fund and ETFs, and requiring funds to draft plans for how they would unwind and transfer client assets.

Just last week, the SEC sought public comment on exchange-traded products, such as ETFs, with an eye toward determining how they are marketed to and traded by retail investors.

Stein said Monday that while the rules on the books require funds to disclose a lot of information for investors, over the years there has been a shift that "places the onus on the retail investor to figure out whether a fund is right for him or her."

She raised concerns, for instance, that some funds are able to bypass a rule which is supposed to limit their investments in illiquid assets to 15 percent.

Such funds, she said, are investing in illiquid bank loans, but they are calculating the 15 percent threshold by basing it on when a contract price is struck to sell the underlying bank loan - and not when the loan actually settles.

She also said SEC staff have granted nearly 30 exemptions to new funds that permit them to use derivatives, saying this has "chipped away" at true leverage restrictions.