SEC Request for Comment on Novel ETFs

Summary

SIFMA provided comments to the U.S. Securities and Exchange Commission (SEC) on its Request for Comment on Novel ETFs, which seeks input on exchange-traded funds that invest in innovative asset classes or pursue novel investment strategies. SIFMA’s comments address considerations related to investor protection, fair and efficient markets, and capital formation.

Excerpt

The Securities Industry and Financial Markets Association (“SIFMA”) ¹ appreciates the opportunity to comment on the SEC’s Request for Comment on Novel ETFs (the “Request”). ² The Request seeks public comment on exchange-traded funds (“ETFs”) that “invest in innovative asset classes or engage in novel investment strategies” (“Novel ETFs”). The stated purpose of the Request is to assess whether further action is necessary with respect to Novel ETFs in order to better protect investors, maintain fair and efficient markets, and facilitate capital formation.

SIFMA generally supports the SEC staff’s efforts to address the challenges highlighted in the Request. SIFMA AMG likewise generally supports this objective and is submitting a separate comment letter to the SEC from the fund sponsor/asset manager perspective and from the authorized participant/market maker perspective, including ETF market making best practices.

The comments expressed herein are from the perspective of broker-dealers (“BDs”) and registered investment advisers (“RIAs”) that recommend and provide investment advice about Novel ETFs (as well as exchange-traded products (“ETPs”)), and otherwise make available Novel ETFs and ETPs, to clients and customers. Notably, a number of the questions and themes raised in the Request are substantially similar to those raised in FINRA’s complex products notice and request for comment in 2022. ³ Accordingly, some of SIFMA’s responses to FINRA’s 2022 notice bear reemphasis here. ⁴ We respectfully submit the following additional comments and recommendations for your consideration.

Executive Summary

• The existing regulatory regime for transactions in Novel ETFs that are recommended by BDs, or advised by RIAs, is sufficient to protect investors; special enforcement focus on Novel ETFs is unwarranted.
• All ETFs should be subject to the same regulatory regime and review process, focused not on novelty but on the complexity of, and the level of risk and unique types of risk associated with, the particular ETF.
• Retail investors’ understanding of the features of ETFs (including Novel ETFs) would be enhanced by a transparent naming convention.
• The staff’s product review of new ETFs should proceed on a case-by-case basis and the staff should use its existing regulatory tools to take additional time to answer material legal or other questions that remain open regarding the new ETF.