ETF Prime: FINRA's Proposal and More

The conversation opens by discussing the proposal by FINRA, the regulatory body over brokerages, that would require investors to pass a test before they can invest in what FINRA deems as “complex” products. Geraci explains that the ETF industry’s concern over this proposal is in how FINRA will choose to define a fund as complex, whether it’s products such as inverse or leveraged or simply anything beyond the very vanilla benchmarked funds, and the potentials for gatekeeping that could arise as well as if brokerages should even be testing their investors.

FINRA is calling for comments on two different areas, both the proposal surrounding complex products and proposing more regulation on options trading, Crigger explains.

“FINRA wants to define complex products, and the way that they’ve done that, the net their proposal is casting, is extending so far and wide that pretty much every ETF that isn’t a pure, market beta, indexed product would potentially fall into this net,” Crigger says.

The proposal means that retail investors would have to prove to FINRA that they understand the products they are seeking to invest in and the risks. It’s a proposal that Crigger believes ultimately oversteps the reach of FINRA and would be the first time a regulatory body took a publicly-traded security and essentially locked it away from a portion of investors.

“FINRA’s jurisdiction isn’t over retail investors, so why should retail investors be forced to get special approval from FINRA members to do what they want with their own money?” Crigger asks.

The two also discuss the SEC’s investigation into ETF revenue-sharing practices in what has become somewhat of a “pay-to-play” atmosphere for ETF issuers looking to list their funds on platforms, a carryover from the same practice with mutual funds, as well as the Barclay ETN suspension.

Ben Slavin, global head of ETFs-asset servicing at BNY Mellon, is on next and talks about FINRA from an issuer perspective and the industry’s concerns. Talk then pivots to the Vanguard patent that allows Vanguard to offer ETFs as a share-class of their mutual funds, thereby granting certain benefits, the upcoming patent expiration next year, and interest in pursuing the patent by other issuers.

“I do not expect this to be widespread,” Slavin says, describing other issuers attempting to pick up the patent. “We’ll probably see more bitcoin ETF filings still pending versus these filings for share-classes, but really once these patents expire, other firms will no longer need to deal with Vanguard, but they will need to deal with the SEC, and that’s where the concern lies at this stage.”

Slavin and Geraci also discuss mutual fund conversions to ETFs and the wide-ranging implications, including the traditional use of mutual funds in 401(k)s and bitcoin and crypto funds and filings with the SEC and crypto’s use abroad.

Last on is Oktay Kavrak, director at Leverage Shares, to discuss their funds that trade in Europe; all are physically backed, meaning that they are fully collateralized with the actual underlying holding. The lineup contains 144 ETPs, and the most popular offerings focus on single stocks such as Tesla, Nio, Alibaba, and others and offers long and short options with various multiples of leverage.

“In terms of the regulations and the regulators in Europe, I think they have a higher emphasis on disclosure versus, I would say, the more paternalistic U.S. investor-protection mentality of the SEC,” Kavrak explains of why the leveraged funds are only available in Europe for now.

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