U.S. Securities and Exchange Commission Chairman Jay Clayton is working to streamline the agency’s ad hoc approach to approving new exchange-traded funds, putting a spotlight on an issue that has vexed the regulator for a decade.
Clayton, who joined the SEC in May, has asked staff to build upon a proposal that was nearly adopted before the 2008 financial crisis doomed its chances, three people familiar with the matter said. A new rule would likely be welcomed by much of the mutual fund industry, which often complains about the costs and how long it takes to get the agency’s sign-off.
“It’s about time,” said Paul Atkins, a former SEC commissioner who consults for some asset management firms as head of Patomak Global Partners. “People need to know what the rules are.”
The SEC has never developed comprehensive policies governing ETFs, which are similar to mutual funds but trade like stocks, even as more small investors have poured money into the products. As the funds have grown into a $3 trillion market in the U.S., companies have designed increasingly complicated products to offer more variety and compete for customers seeking higher returns.
While ETFs started as a way to buy into indexes like the S&P 500 and pay minimal fees and taxes, investors now can buy funds that employ strategies like leverage or short selling or focus on narrow, thinly-traded market sectors.
Those development have raised concerns at the SEC that investors may not fully understand what they’re buying. Regulators also have looked into instances where ETFs trade differently from their underlying assets. Critics argue that the funds could exacerbate a market sell off.
Supporters in the industry have long urged the SEC to lay out formal steps for approving ETFs, ending the practice of having every firm that wants to start one apply and wait for a special order from the agency that allows them to operate.
The current approach gives more established firms a leg up because they can afford to shoulder the legal costs and often lengthy wait, critics say. The process also makes poor use of SEC resources, they say, because agency staff members have to spend a lot of time approving “plain vanilla” ETFs instead of focusing on more complex vehicles that might pose problems.
Money managers, including Goldman Sachs Group Inc., which started its first ETF in 2015, and Pacific Investment Management Co., have been lobbying for more flexibility in setting up the funds. Mark Wiedman, global head of BlackRock’s iShares business, said in an interview last month that the current process has created “an unlevel playing field.”
Chris Carofine, an SEC spokesman, declined to comment.