ETF Growth Raises Need for Regulator Scrutiny, SEC’s Stein Says

Regulators should scrutinize whether growth of exchange-traded funds creates systemic risk as more funds use complex strategies and invest in less liquid assets, Securities and Exchange Commissioner Kara Stein said.

ETFs have become “significantly more complex” since they first began trading, offering exposures across geographies, industries, currencies, commodities and real estate, Stein said yesterday in a speech at Columbia Law School in New York. Their rising market share increases the importance of regulators seeking answers to questions such as whether they amplify volatility in a way that can be harmful to markets, she said.

“I worry that these larger questions have been getting lost,” Stein said. Some ETFs are being approved “without the kind of broad attention that is necessary,” she said.

ETFs have attracted regulatory scrutiny as assets surged more than 10-fold in the U.S. over the past decade to $1.7 trillion as of the end of 2013, according to the Investment Company Institute. The products are bundles of securities that trade on an exchange, like stocks. Investors in most mutual funds can buy or sell shares once a day, typically after markets close, and only directly with the fund.

The SEC has a team monitoring the growing exchange-traded products industry, of which ETFs are most popular, according to Stein, who said she’s seeking process for getting public comment on issues related to the securities.

“This is an area where we would benefit immensely from public input,” she said.

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