The Securities and Exchange Commission is proposing new rules that will make it harder to invest in “geared” exchange-traded funds, an in-vogue term for leveraged and inverse ETFs. The SEC’s timing is especially awkward, given that many financial advisors and their clients were seeking defensive investment options, like inverse funds, as equities tumbled during the coronavirus crisis.

Under the proposed rule 18f-4, investors will be required to provide extensive personal financial and related data to their broker or advisor before being allowed to buy geared funds. This same rule was originally proposed in 2015, but got abandoned. Clearly, the original rule, like the current re-proposed one, has serious flaws. Why was it allowed to be resurrected?

As of early March, there were 162 geared ETFs with assets under management of $38.6 billion, according to They cover various asset classes including stocks, bonds, currencies, commodities and alternatives.

Let’s examine a few reasons the SEC’s re-regulation of geared ETFs is unnecessary.

The new rule misses a big problem. The lack of uniformity in the names of leveraged and inverse-performing ETFs is a big problem. Not only does it contribute to investors’ confusion, but the SEC’s proposed rule says nothing about it. For example, certain geared ETFs include the amount of daily leverage they use (whether it is “2x” or “3x”) in their actual fund names while other ETFs that provide similar leveraged exposure don’t. These inconsistencies should be fixed before the SEC proposes new rules.

Re-regulating registered products is overkill. ETFs are already heavily regulated products that require a prospectus, along with other disclosures and legal filings before they reach the publicly traded markets. Adding another layer of regulation via cumbersome paperwork would be entirely new terrain for registered products that could restrict unfettered access to publicly traded securities.

There’s an onerous cost for compliance. It’s been said the principal job of any good police force is to protect the city, not to destroy it. Unfortunately, rule 18f-4 leans more toward the latter because it’s going to cost a massive $2.4 billion, plus another $450 million annually, for the ETF industry to comply, according to the SEC Division of Economic and Risk Analysis. The unintended consequences of these higher compliance costs will be absorbed by investors, the very group the SEC is trying to protect.

Investor complaints are declining. A July 2019 survey by the North American Securities Administrators Association found that “the number of customer complaints, regulatory actions and arbitration awards or civil [judgments] regarding leveraged and or inverse ETFs in recent years was low.” Why is the SEC aggressively pursuing the re-regulation of ETF products with declining levels of customer complaints? Shouldn’t regulatory attention be centered on products and in markets where complaints are rising? 

Many years ago, a veteran securities attorney once told me that financial markets are over-regulated and under-policed. Is the SEC over-regulating in the case of geared ETFs? I’ve worked in the ETF industry since 2003, and my take is that it clearly is. Enforcing existing securities rules that govern geared ETFs should be the SEC’s priority, not creating new rules.

The open comment period on ETF rule 18f-4 expired on March 24, and the SEC’s final rule determination had not been made when this article went to press.