SEC’s ‘complex’ ETP probe could impact crypto ETFs
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The Securities and Exchange Commission’s indication that it is going to look more closely at how it regulates complex exchange traded products has implications for future bitcoin ETF rules, say attorneys and analysts.
Last week, SEC Chair Gary Gensler directed staff to study the risks of ETFs employing strategies “more complex than typical stocks and bonds” and draft potential rules to address those concerns.
Gensler cited leveraged and inverse strategies as examples of complex ETPs. Commissioners Allison Herren Lee and Caroline Crenshaw, however, suggested that any new rules would cover ETPs that are not regulated by the Investment Company Act, such as exchange traded notes, commodity pools and other structured notes.
“While there are differences in the structures of these products, they can pose similar risks to investors and the markets, and the commission should endeavour to adopt a consistent approach to managing such risks to ensure that our rules do not needlessly create opportunities for regulatory arbitrage,” they wrote in a statement.
History suggests the SEC wants to control when and how crypto ETFs come to market, said Jeremy Senderowicz, shareholder at Vedder Price.
“With bitcoin, they probably wouldn’t want to be too quick on issuing a general rule,” he said.
Historically, the SEC commissioners had used the exchange listing rule process — known as the 19b-4 process — to vet and approve the first generation of new ETF concepts, including the first fixed-income ETFs and active-nontransparent strategies, he said.
The SEC’s work on ETFs also sits within a broader project to rein in crypto finance, which Gensler described as a “Wild West or the old world of ‘buyer beware’ that existed before securities laws were enacted”.
“This asset class is rife with fraud, scams and abuse in certain applications,” Gensler told the House Financial Services Committee in prepared remarks. “We can do better.”
But one attorney expressed concern that if regulators do not address crypto ETFs soon, or at least set up a framework for how they might be reviewed through new complex ETP regulations, there was a risk that more investors would seek access outside the SEC’s jurisdiction.
“It’s easier to get a clearer picture of what you’re going to be regulating in the future if you make clear what you are regulating now,” said M Ridgway Barker, chair of the corporate finance group at Withersworldwide. The bitcoin market had grown rapidly since the SEC began looking at the first of such products five years ago, he noted.
The SEC might want to focus its regulatory efforts on requiring that complex ETFs clarify their existing disclosures, rather than creating new ones, he added.
But even if bitcoin was not addressed specifically in additional regulation of complex ETPs, such products could be caught up in new sales practice rules governing ETPs, according to Vedder Price’s Senderowicz and Dave Nadig, director of research and chief investment officer of ETF Trends.
The SEC’s decision to scrub heightened due-diligence practices for leveraged and inverse ETFs from the final derivatives rule prompted Crenshaw and Herren Lee to withhold their approval of the regulation.
Any new complex ETP rules should “renew that effort and consider expanding it beyond registered investment companies to reach other types of complex exchange-traded products,” they said last week in their joint statement.
In Europe, complex ETPs triggered a host of specific sales rules such as know-your-customer regulations and platform-access restrictions, Nadig noted.
“If something like [sales restrictions] were to be enacted, that could apply to bitcoin ETFs,” Senderowicz added.
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